Form: 10-K405

Annual report [Sections 13 and 15(d), S-K Item 405]

March 25, 1998

Documents

10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]

Published on March 25, 1998




- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

COMMISSION FILE NUMBER: 1-11314

LTC PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)


MARYLAND 71-0720518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)

Registrant's telephone number, including area code: (805) 981-8655

Securities registered pursuant to Section 12(b) of the Act:




Title of Stock Name of each exchange on which registered
-------------- -----------------------------------------

Common stock, $.01 Par Value New York Stock Exchange
9.50% Series A Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange
9.00% Series B Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange
9.75% Convertible Subordinated Debentures due 2004 New York Stock Exchange
8.50% Convertible Subordinated Debentures due 2000 New York Stock Exchange
8.50% Convertible Subordinated Debentures due 2001 New York Stock Exchange
7.75% Convertible Subordinated Debentures due 2002 New York Stock Exchange
8.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange
8.25% Convertible Subordinated Debentures due 1999 New York Stock Exchange



Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-K or
any amendment to this Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of
the Company is approximately $494,733,000 as of March 20, 1998.

26,157,659
(Number of shares of common stock outstanding as of March 20, 1998)

Part III is incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 19, 1998.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------


ITEM 1. BUSINESS

GENERAL

LTC Properties, Inc. (the "Company"), a health care real estate
investment trust (a "REIT"), was organized on May 12, 1992 in the State of
Maryland and commenced operations on August 25, 1992. The Company invests in
long-term care and other health care related facilities through mortgage
loans, facility lease transactions and other investments. The primary
objective of the Company is to provide current income for distribution to
stockholders through real estate investments in long-term care facilities and
other health care related facilities managed by experienced operators
providing quality care. To meet this objective, the Company attempts to
invest in properties that provide opportunity for additional returns to its
stockholders and diversify its investment portfolio by geographic location,
operator and form of investment.

The Company was organized to qualify, and intends to continue to
qualify, as a REIT. So long as the Company so qualifies, with limited
exceptions, the Company may deduct distributions to its stockholders from its
taxable income. The Company has distributed, and intends to continue to make
distributions to its stockholders, in order to eliminate any federal tax
liability.

At December 31, 1997, the Company had investments in 274 skilled
nursing facilities with 31,462 beds and 77 assisted living facilities with
3,281 units operated by 83 healthcare providers in 34 states.

OWNED PROPERTIES. During 1997, the Company acquired 42 assisted
living facilities and nine skilled nursing facilities for approximately
$118,564,000. One of the skilled nursing facilities was acquired for
$4,678,000 by a newly formed limited partnership of which the Company,
through certain of its subsidiaries, is the general partner and was purchased
subject to a mortgage loan of approximately $3,026,000. In 1997, the Company
agreed to enter into sale-leaseback transactions with Assisted Living
Concepts, Inc. ("ALC") under which ALC is obligated to sell and the Company
is obligated to purchase 11 assisted living residences totaling $29,864,000.
These transactions will be completed by the third quarter of 1998. In
connection with the above agreement, the Company sold 12 properties back to
ALC for $27,690,000 and terminated a commitment of $13,070,000 that was
scheduled to expire on December 31, 1997.

The Company's long-term facilities are leased to operators pursuant
to long-term "triple net" leases and provide for increases in the rent based
upon specified rent increases, increases in revenues over defined base
periods, or increases based on consumer price indices.

MORTGAGE LOANS. As part of the Company's strategy of making
long-term investments in properties used in the provision of long-term health
care services, the Company provides mortgage financing on such properties
based on the investment underwriting criteria established by the Company.
(See "Investment and Other Policies" in this Section.) The Company also
provides construction loans that by their terms generally convert into
purchase/lease transactions or permanent financing mortgage loans upon
completion of construction. During 1997, the Company originated mortgage
loans of $98,135,000 secured by 33 skilled nursing facilities and nine
assisted living facilities and provided net construction funding of
$9,352,000. Of the mortgage loans originated in 1997, loans secured by seven
assisted living facilities, totaling $14,510,000 were repaid during 1997.

The Company maintains a long-term investment interest in its
mortgages either through the direct retention of mortgages or through the
retention of REMIC certificates originated in the Company's securitizations.
The Company may, from time-to-time, securitize a portion of its mortgage loan
portfolio when a securitization provides the Company with the best available
form of raising capital to make additional long-term investments. In
addition, the Company believes that the certificates retained by the

2

Company in its securitizations provide its shareholders with a more diverse
real estate investment while maintaining the returns desired by the Company.
Because the Company anticipates securitizing additional portions of its
mortgage loan portfolio in the future, its mortgage loan investments are
carried at the lower of cost-or-market.

REMIC CERTIFICATES. Prior to 1997, the Company securitized mortgage
loans with an aggregate outstanding principal balance of approximately
$354,827,000 by creating Real Estate Mortgage Investment Conduits ("REMIC")
which, in turn, issued mortgage pass-through certificates ("REMIC
Certificates") aggregating approximately the same amount. A portion of the
REMIC Certificates were subsequently sold to third parties. The REMIC
Certificates retained by the Company are subordinated in right of payment to
the REMIC Certificates sold to third parties. A portion of the REMIC
Certificates retained by the Company are interest-only certificates which
have no principal amount and entitle the Company to receive cash flows
designated as interest. During 1997, the Company received proceeds of
$11,811,000 from the sale of subordinated REMIC Certificates which were
retained from a securitization completed in 1996. The proceeds from the sale
were used to pay down outstanding borrowings under the Company's lines of
credit. At December 31, 1997, the Company had investments in REMIC
Certificates with an estimated fair value of $87,811,000. (See "Part 1,
Item 2 -- Properties -- REMIC Certificates.")

FINANCING AND OTHER TRANSACTIONS. During 1997, the Company completed
public offerings for 2,000,000 shares of common stock resulting in aggregate
net proceeds of $35,065,000. In addition, the Company issued 3,080,000 shares
of 9.5% Series A Cumulative Preferred Stock ("Series A Preferred Stock") and
2,000,000 shares of 9.0% Series B Cumulative Preferred Stock ("Series B
Preferred Stock") for total net proceeds of $121,600,000. Dividends on the
Series A Preferred Stock and Series B Preferred Stock are cumulative from the
date of original issue and are payable monthly to stockholders of record on
the first day of each month. Dividends on the Series A Preferred Stock and
the Series B Preferred Stock accrue at 9.5% and 9.0% per annum, respectively,
on the $25 liquidation preference per share (equivalent to a fixed annual
amount of $2.375 and $2.25 per share, respectively). The Series A Preferred
Stock is not redeemable prior to April 1, 2001 and the Series B Preferred
Stock is not redeemable prior to January 1, 2002, except in certain
circumstances relating to preservation of the Company's qualification as a
REIT. The net proceeds from these offerings were used to repay borrowings
under the Company's lines of credit.

During 1997, the Company replaced its existing credit facilities with a
$170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit
Facility") that expires on October 3, 2000. As of December 31, 1997, borrowings
of $87,500,000 bearing interest at LIBOR plus 1.375% were outstanding under the
Revolving Credit Facility.

INVESTMENT AND OTHER POLICIES

OBJECTIVES AND POLICIES. The Company currently invests in
income-producing long-term care facilities. The Company invests either (1)
directly in mortgage loans secured by long-term care facilities, (2) in the fee
ownership of long-term care facilities which are leased to operators or (3) or
may participate in such investments indirectly through investments in
partnerships, joint ventures or other entities that themselves make direct
investments in such loans or facilities.

In evaluating potential investments, the Company considers such factors
as (i) type of property, (ii) the location, construction quality, condition and
design of the property, (iii) the property's current and anticipated cash flow
and its adequacy to meet operational needs and lease obligations or debt service
obligations, (iv) the quality and reputation of the property's operator, (v) the
growth, tax and regulatory environments of the communities in which the
properties are located, (vi) the occupancy and demand for similar long-term care
facilities in the area surrounding the property and (vii) the Medicaid
reimbursement policies and plans of the state in which the property is located.

3

The Company places primary emphasis on investing in long-term care
facilities that have low investment per bed/unit ratios and do not have to
rely on the provision of ancillary services to cover debt service or lease
obligations. In addition, with respect to skilled nursing facilities, the
Company attempts to invest in facilities that do not have to rely on a high
percentage of private pay patients. The Company seeks to invest in facilities
that are located in suburban and rural areas of states with improving
reimbursement climates. Prior to every investment, the Company conducts a
facility site review to assess the general physical condition of the
facility, the potential of additional sub-acute services and the quality of
care the operator provides. In addition, the Company reviews the
environmental reports, state survey and financial statements of the facility
before the investment is made. The Company prefers to invest in facilities
that have a significant market presence in its community and where state
licensing procedures limit the entry of competing facilities. To date, a
majority of the Company's investments have been made in the form of mortgage
loans secured by skilled nursing facilities. Due to management's belief that
assisted living facilities are an increasingly important sector in the
long-term care market, a larger portion of the Company's future investments
will be made in the form of direct ownership of assisted living facilities.
Management believes that assisted living facilities represent a lower cost
long-term care alternative for senior adults than skilled nursing facilities.
The Company invests primarily in assisted living facilities that attract the
moderate-income private pay patients in smaller communities, preferably in
states that have adopted Medicaid waiver programs or are in the process of
adopting or reviewing their policies and reimbursement program to provide
funding for assisted living residences. The Company believes that locating
residences in a state with a favorable regulatory reimbursement climate
should provide a stable source of residents eligible for Medicaid
reimbursement to the extent private-pay residents are not available, and
should provide alternative sources of income for residents when their private
funds are depleted and they become Medicaid eligible.

There are no limitations on the amount or percentage of the Company's
total assets that may be invested in any one property or joint venture, except
for investments in assisted living facilities ("ALFs"). The Board of Directors
has authorized the Company to invest up to 30% of the Company's adjusted gross
real estate investment portfolio (adjusted to include mortgage loans to third
parties underlying the investment in REMIC Certificates) in ALFs, with a 20%
limit on investments in properties operated by ALC. ALC is an owner, operator
and developer of assisted living facilities. Except for ALFs, no other limits
have been set on the number of properties in which the Company will seek to
invest, or of the concentration of investments in any one facility or any one
city or state, or the type or form of investment.

BORROWING POLICIES. The Company may incur additional indebtedness when,
in the opinion of the directors, it is advisable. The Company may incur such
indebtedness to make investments in additional long-term care facilities or to
meet the distribution requirements imposed upon REITs under the Internal Revenue
Code of 1986, as amended (the "Code") (see Taxation of the Company--Requirements
for Qualifications). For other short-term purposes, the Company may, from time
to time, negotiate lines of credit, or arrange for other short-term borrowings
from banks or otherwise. The Company may also arrange for long-term borrowings
through public offerings or from institutional investors.

In addition, the Company may incur mortgage indebtedness on real estate
which it has acquired through purchase, foreclosure or otherwise. The Company
may also obtain mortgage financing for unleveraged or underleveraged properties
in which it has invested or may refinance properties acquired on a leveraged
basis. There is no limitation on the number or amount of mortgages which may be
placed on any one property, and the Company has no policy with respect to
limitations on borrowing, whether secured or unsecured.

4

PROHIBITED INVESTMENTS AND ACTIVITIES. The policies of the Company,
subject to change by the Board of Directors without stockholder approval,
impose certain prohibitions and restrictions on various investment practices
or activities of the Company including prohibition against:

(i) acquiring any real property unless the consideration paid for
such real property is based on the fair market value of the
property;

(ii) investing in any junior mortgage loan unless by appraisal or
other method, the directors determine that (a) the capital
invested in any such loan is adequately secured on the basis of
the equity of the borrower in the property underlying such
investment and the ability of the borrower to repay the mortgage
loan or (b) such loan is a financing device entered into by the
Company to establish the priority of its capital investment
over the capital invested by others investing with the Company
in a real estate project;

(iii) investing in commodities or commodity futures contracts (other
than interest rate futures, when used solely for hedging
purposes);

(iv) investing more than 1% of the Company's total assets in contracts
for sale of real estate unless such contracts are recordable in
the chain of title;

(v) holding equity investments in unimproved, non-income producing real
property, except such properties as are currently undergoing
development or are presently intended to be developed within one
year, together with mortgage loans on such property (other than
first mortgage development loans), aggregating to more than 10%
of the Company's assets.

COMPETITION

The Company competes with other REITs, real estate partnerships, health
care providers and other investors, including commercial banks, institutional
banks and insurance companies, many of which will have greater financial
resources and lower cost of funds than the Company, in the acquisition, leasing
and financing of long-term care facilities. The operators compete on a local and
regional basis with operators of facilities that provide comparable services.
Operators compete for patients based on quality of care, reputation, physical
appearance of facilities, services offered, family preferences, physician
referrals, staff and price.

INSURANCE

The Company obtains title insurance with respect to each of its
investments. The Company generally requires: (i) with respect to each owned
property, an American Land Title Association ("ALTA") Extended Coverage Owner's
Policy of Title Insurance with an insured amount equal to the purchase price,
insuring that the Company holds fee simple title to the property subject only to
those liens and encumbrances approved by the Company; and (ii) with respect to
each mortgaged property, an ALTA Extended Coverage Lender's Policy of Title
Insurance with an insured amount equal to the loan amount, insuring the
Company's first-lien security interest in the property subject only to those
liens and encumbrances approved by the Company. However, ALTA Extended Coverage
Policies of Title Insurance are not available in all states, in which event the
Company requires the broadest form of title coverage available in the particular
jurisdiction.

In addition, the Company requires that its tenants (in the case of
owned properties) and borrowers (in the case of mortgaged properties)
maintain comprehensive liability insurance and casualty insurance with policy
specifications and insured limits customarily carried for similar properties
and cause their insurers to name the Company as an additional insured, loss
payee and/or mortgagee, as appropriate depending on the particular type of
policy. In the case of casualty insurance, the insured limits may not be less
than the full replacement cost of the improvements constructed on the
property, and coverage is typically provided in the form of an "all-risk"
policy. However, there are certain types of losses which may either be
uninsurable or not economically insurable. For example, the Company generally
requires its tenants and borrowers to carry

5

flood insurance if the property is located within a flood plain area as
designated by the applicable governmental authority, and earthquake insurance
if the property is located in a state, such as California, where the risk of
earthquake damage is high. Such flood and earthquake coverage is not always
an insurable risk or may not be obtainable in amounts at least equal to the
full replacement cost of the improvements constructed on the property.
Accordingly, there is no assurance that adequate coverage exists with respect
to each investment should there be serious flooding, seismic activities or
other uninsurable casualty in the areas where the properties constituting the
Company's investments are located. Should an uninsured (or less than fully
insured) loss occur, the Company could lose its investment in, and
anticipated profits and cash flow from, a property.

EMPLOYEES

The Company currently employs 19 persons.

GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE

GENERAL. Medicaid programs or the equivalent are currently in existence
in all of the states in which the Company has nursing facility investments.
While these programs differ in certain respects from state to state, they are
all subject to certain federally imposed requirements, as a substantial portion
of the funds available under these programs is provided by the federal
government. Medicaid programs provide for payments to participating health care
facilities on behalf of the indigent and certain other eligible persons.
California and Texas provide for reimbursement at flat daily rates, as
determined by the responsible state agency and depending on certain levels of
care. In all other states, payments are based upon specific cost reimbursement
formulas established by the applicable state.

Medicare and most state Medicaid programs utilize a cost-based
reimbursement system for nursing facilities which reimburses facilities for the
reasonable direct and indirect allowable costs incurred in providing routine
services (as defined by the programs) plus, in certain states, a return on
equity, subject to certain cost ceilings. These costs normally include
allowances for administrative and general costs as well as the costs of property
and equipment (depreciation and interest, fair rental allowance or rental
expense). In certain states, cost-based reimbursement is typically subject to
retrospective adjustment through cost report settlement, and for certain states,
payments made to a facility on an interim basis that are subsequently determined
to be less than or in excess of allowable costs may be adjusted through future
payments to the affected facility and to other facilities owned by the same
owner. State Medicaid reimbursement programs vary as to the methodology used to
determine the level of allowable costs which are reimbursed to operators.

The Medicaid and Medicare programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to health care
facilities. No assurance can be given as to whether the future funding of such
programs will remain at levels comparable to the present levels.

Both the Medicaid and Medicare programs contain specific requirements
which must be adhered to at all times by health care facilities in order to
qualify under the programs. Based upon such information as periodically received
by the Company from the operators over the term of the lease/loan, the Company
believes that the nursing facilities in which it has investments are in
substantial compliance with the various regulatory requirements applicable to
them, although there can be no assurance that the operators are in compliance or
will be so at any time.

In addition to the requirements to be met by the nursing facilities for
participation in the Medicaid and Medicare programs, the nursing facilities are
subject to regulatory and licensing requirements of federal, state

6

and local authorities. The operator of each long-term care facility is
licensed annually by the board of health or other applicable agency in each
state. In granting and renewing licenses, regulatory agencies consider, among
other things, the physical buildings and equipment, the qualifications of the
administrative personnel and nursing staff, the quality of care and
continuing compliance with the laws and regulations relating to the operation
of the facilities. State licensing of facilities is a prerequisite to
certification under Medicaid and Medicare programs. In the ordinary course of
business, the operators receive notices of deficiencies for failure to comply
with various regulatory requirements and take appropriate corrective and
preventive actions. The Company believes that the nursing facilities in which
it has investments are in compliance with the applicable licensing or other
regulation although there can be no assurance that the operators are or will
be in compliance at any time.

The Company has increased its investments in ALFs in recent years. ALFs
are subject to certain state regulations and licensing requirements. In order to
qualify as a state licensed facility, ALFs must comply with regulations which
address, among other things, staffing, physical design, required services and
resident characteristics. ALFs are also subject to various local building codes
and other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.

Currently, ALFs are not regulated as such by the federal government.
State standards required for ALF providers are less stringent than those
required of other licensed health care operators. There can be no assurance that
federal regulations governing the operation of ALFs will not be implemented in
the future or that existing state regulations will not be expanded. In addition,
only certain states have adopted laws or regulations permitting individuals with
higher acuity levels to remain in assisted living communities who may otherwise
qualify for placement in a nursing facility. While only certain states presently
provide for any Medicaid reimbursement for assisted living residences, several
states are currently reviewing their policies and reimbursement programs to
provide funding for assisted living residences. There can be no assurance that
such states will adopt the Medicaid waiver program.

HEALTH CARE REFORM. The Balanced Budget Act of 1997 signed by President
Clinton on August 5, 1997 (the "Act"), enacted significant changes to the
Medicare and Medicaid Programs designed to "modernize" payment and health care
delivery systems while achieving substantial budgetary savings.

In seeking to limit Medicare reimbursement for long term care services,
Congress has established a prospective payment system for skilled nursing
facility services to replace the current cost-based reimbursement system. The
cost based system reimburses nursing facilities for reasonable direct and
indirect allowable costs incurred in providing "routine services" (as defined by
the Program) as well as capital costs and ancillary costs. Cost based
reimbursement has been subject to limits fixed for the particular geographic
area served by a nursing facility. Under the prospective payment system, skilled
nursing facilities will be paid a federal per diem rate for covered services.
The per diem payment will cover routine service, ancillary, and capital-related
costs. The prospective payment system will be phased in over three cost
reporting periods, starting with periods beginning on or after July 1, 1998. The
actual rate paid to a skilled nursing facility will be adjusted for case mix and
relative wage-related costs.

Under provisions of the Act, states will be provided additional
flexibility in managing their Medicaid programs while achieving in excess of
$13 billion in federal budgetary savings over five years. Among other things,
the Act repealed the Boren Amendment payment standard, which had required
states to pay "reasonable and adequate" payments to cover the costs of
efficiently and economically operated hospitals, nursing facilities, and
certain intermediate care facilities. States, however, will be required to
use a public notice and comment process in determining rates for such
facilities. During rate-setting procedures states also will be required to
take into account the situation of facilities that serve a disproportionate
number of low-income patients with

7

special needs. The Secretary of the Department of Health and Human Services
is required to study and report to Congress within four years concerning the
effect of State rate-setting methodologies on the access to and the quality
of services provided to Medicaid beneficiaries. The Act also provides the
Federal Government with expanded enforcement powers to combat waste, fraud
and abuse in delivery of health care services. In light of forthcoming
regulations and continuing state Program reform, no assurance can be given
that the implementation of such regulations and reform will not have a
material adverse effect on the Company's financial condition or results of
operations.

TAXATION OF THE COMPANY

GENERAL. Management of the Company believes that the Company has
operated in such a manner as to qualify for taxation as a real estate investment
trust ("REIT") under Sections 856 to 860 of the Internal Revenue Code of 1986,
as amended (the "Code"), commencing with its taxable year ended December 31,
1992, and the Company intends to continue to operate in such a manner. No
assurance can be given that it has operated or will be able to continue to
operate in a manner so as to qualify or to remain so qualified. This summary is
qualified in its entirety by the applicable Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretation thereof.

If the Company qualifies for taxation as a REIT, it will generally not
be subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the "double
taxation" (i.e., at the corporate and stockholder levels) that generally results
from investment in a corporation. However, the Company will continue to be
subject to federal income tax under certain circumstances.

REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a
corporation, trust or association (i) which is managed by one or more trustees
or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) which would be taxable, but for Sections 856 through 860 of the Code, as a
domestic corporation; (iv) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code; (v) the beneficial
ownership of which is held by 100 or more persons; (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, actually or constructively, by five or fewer individuals; and (vii)
which meets certain other tests, described below, regarding the amount of its
distributions and the nature of its income and assets. The Code provides that
conditions (i) to (iv), inclusive, must be met during the entire taxable year
and that condition (v) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months.

INCOME TESTS. There presently are two gross income requirements that
the Company must satisfy to qualify as a REIT, and, with respect to taxable
years of the Company beginning before August 6, 1997, there was a third gross
income requirement. First, at least 75% of the Company's gross income (excluding
gross income from Prohibited Transactions as defined below) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property or from certain types of temporary
investment income. Second, at least 95% of the Company's gross income (excluding
gross income from Prohibited Transactions) for each taxable year must be derived
from income that qualifies under the 75% test and all other dividends, interest
and gain from the sale or other disposition of stock or securities. Third, for
taxable years of the Company beginning before August 6, 1997, short-term gains
from the sale or other disposition of stock or securities, gains from Prohibited
Transactions and gains on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the Company's gross income
for each such taxable year. A Prohibited Transaction is a sale or other
disposition of property (other than foreclosure property) held for sale to
customers in the ordinary course of business.

8

ASSET TESTS. The Company, at the close of each quarter of its
taxable year, must also satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of the Company's total assets must
be represented by real estate assets (including stock or debt instruments
held for not more than one year, purchased with the proceeds of a stock
offering or long-term (more than five years) public debt offering of the
Company), cash, cash items and government securities. Second, not more than
25% of the Company's total assets may be represented by securities other than
those in the 75% asset class. Third, of the investments included in the 25%
asset class, the value of any one issuer's securities owned by the Company
may not exceed 5% of the value of the Company's total assets and the Company
may not own more than 10% of any one issuer's outstanding voting securities.

OWNERSHIP OF A PARTNERSHIP INTEREST OR STOCK IN A CORPORATION. The
Company owns interests in various partnerships. In the case of a REIT that is
a partner in a partnership, Treasury Regulations provide that for purposes of
the REIT income and asset tests, the REIT will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. The
ownership of an interest in a partnership by a REIT may involve special tax
risks, including the challenge by the Internal Revenue Service of the
allocations of income and expense items of the partnership, which would
affect the computation of taxable income of the REIT, and the status of the
partnership as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. The Company also owns interests
in a number of subsidiaries which are intended to be treated as qualified
real estate investment trust subsidiaries (each, a "QRS"). The Code provides
that such subsidiaries will be ignored for federal income tax purposes and
all assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and such items of the
Company. The Company further owns 100% of the nonvoting preferred stock in
one subsidiary, LTC Development Company, Inc. ("LTC Development"), which
represents approximately 99% of the economic value of all classes of stock of
LTC Development. President Clinton's fiscal 1999 budget proposal contains a
provision which would amend the Code so as to prohibit REITs from owning
stock of a corporation possessing greater than 10% of the voting power or
value of all classes of stock of such corporation. This proposal would be
effective with respect to stock acquired on or after the date of the first
Congressional committee action with respect to the proposal (the "Action
Date"). In addition, to the extent that a REIT's ownership of stock in a
subsidiary corporation is exempt from this proposal by virtue of the
proposal's effective date, such "grandfathered" status would terminate if
such subsidiary corporation (i) engaged in a trade or business in which it
was not engaged on the Action Date, or (ii) acquired substantial new assets
on or after the Action Date. In the event that such grandfathered status were
so terminated, and the Company did not dispose of its interest in LTC
Development, the Company would fail the third asset test discussed above and
therefore fail to qualify as a REIT. Furthermore, if any partnership or QRS
in which the Company owns an interest were treated as a regular corporation
(and not as a partnership or QRS) for federal income tax purposes, the
Company would likely fail to satisfy the REIT asset tests described above and
would therefore fail to qualify as a REIT. The Company believes that each of
the partnerships and subsidiaries in which it owns an interest (except LTC
Development) will be treated for tax purposes as a partnership or QRS,
respectively, although no assurance can be given that the Internal Revenue
Service will not successfully challenge the status of any such organization.

REMIC. A regular or residual interest in a REMIC will be treated as
a real estate asset for purposes of the REIT asset tests and income derived
with respect to such interest will be treated as interest on an obligation
secured by a mortgage on real property, assuming that at least 95% of the
assets of the REMIC are real estate assets. If less than 95% of the assets of
the REMIC are real estate assets, only a proportionate share of the assets of
and income derived from the REMIC will be treated as qualifying under the
REIT asset and income tests. The Company believes that its REMIC interests
fully qualify for purposes of the REIT income and asset tests.

9

ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify
as a REIT, is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "real estate investment trust taxable income"
(computed without regard to the dividends paid deduction and the Company's
net capital gain) and (ii) 95% of the net income, if any (after tax), from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before the Company timely files its
tax return for such year, if paid on or before the first regular dividend
payment date after such declaration and if the Company so elects and
specifies the dollar amount in its tax return. To the extent that the Company
does not distribute all of its net long-term capital gain or distributes at
least 95%, but less than 100%, of its "real estate investment trust taxable
income," as adjusted, it will be subject to tax thereon at regular corporate
tax rates. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its real estate investment trust
ordinary income for such year, (ii) 95% of its real estate investment capital
gain income for such year, and (iii) any undistributed taxable income from
prior periods, the Company would be subject to a 4% excise tax on the excess
of such required distributions over the amounts actually distributed.

FAILURE TO QUALIFY. If the Company fails to qualify for taxation as
a REIT in any taxable year, and certain relief provisions do not apply, the
Company will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
stockholders in any year in which the Company fails to qualify will not be
deductible by the Company nor will they be required to be made. Unless
entitled to relief under specific statutory provisions, the Company will also
be disqualified from taxation as a REIT for the four taxable years following
the year during which qualification was lost. It is not possible to state
whether in all circumstances the Company would be entitled to the statutory
relief. Failure to qualify for even one year could substantially reduce
distributions to stockholders and could result in the Company's incurring
substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting taxes.

In addition, President Clinton's fiscal 1999 budget proposal
includes a provision which, if enacted in its present form, would result in
the immediate taxation of all gain inherent in a C corporation's assets upon
an election by such corporation to become a REIT in taxable years beginning
after January 1, 1999, and thus could effectively preclude the Company from
re-electing to be taxed as a REIT following a loss of its REIT status.

TAXATION OF STOCKHOLDERS - GENERAL

Distributions made to the Company's taxable U.S. stockholders out of
current or accumulated earnings and profits, unless designated as capital
gain distributions, will be taken into account by them as ordinary income.
Such distributions will not be eligible for the dividends received deductions
for corporations as long as the Company qualifies as a REIT. Distributions
made by the Company that are properly designated by the Company as capital
gain dividends will be taxable to taxable U.S. stockholders as gains (to the
extent that they do not exceed the Company's actual net capital gain for the
taxable year) from the sale or disposition of a capital asset. Depending on
the period of time the Company held the assets which produced such gains, and
on certain designations, if any, which may be made by the Company, such gains
may be taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate.
Corporate stockholders may, however, be required to treat up to 20% of any
such capital gain dividend as ordinary income. Distributions in excess of
current or accumulated earnings and profits will not be taxable to a U.S.
stockholder to the extent that they do not exceed the adjusted basis of such
stockholder's shares. To the extent that such distributions exceed the
adjusted basis of a U.S. stockholder's shares they will be included in income
as capital gain (as described below with respect to the sale or exchange of
the shares) assuming the shares are

10

held as a capital asset in the hands of the stockholder. Stockholders may not
include in their individual income tax returns any net operating losses or
capital losses of the Company.

The Company may elect to retain, rather than distribute as a capital
gain dividend, its net long-term capital gains. In such event, the Company
would pay tax on such retained net long-term capital gains. In addition, to
the extent designated by the Company, a U.S. stockholder generally would (i)
include its proportionate share of such undistributed long-term capital gains
in computing its long-term capital gains in its return for its taxable year
in which the last day of the Company's taxable year falls (subject to certain
limitations as to the amount so includable), (ii) be deemed to have paid the
capital gains tax imposed on the Company on the designated amounts included
in such stockholder's long-term capital gains, (iii) receive a credit or
refund for such amount of tax deemed paid by it, (iv) increase the adjusted
basis of its shares by the difference between the amount of such includable
gains and the tax deemed to have been paid by it, and (v) in the case of a
U.S. stockholder that is a corporation, appropriately adjust its earnings and
profits for the retained capital gains in accordance with Treasury
Regulations to be prescribed by the IRS.

In general, any gain or loss upon a sale or exchange of shares by a
stockholder who has held such shares as a capital asset will be taxable as
long-term capital gain if the shares have been held for more than eighteen
months, mid-term capital gain if the shares have been held for more than one
year but not more than eighteen months, or short-term capital gain if the shares
have been held for one year or less; provided, however, any loss on the sale or
exchange of shares that have been held by such stockholder for six months or
less will be treated as a long-term capital loss to the extent of distributions
from the Company required to be treated by such stockholder as long-term capital
gain.

The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it or
they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Many of the statements herein are forward-looking in nature, and,
accordingly, whether they prove to be accurate is subject to many risks and
uncertainties. The actual results that the Company achieves may differ
materially from many forward-looking statements herein. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed below and those contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as those discussed
elsewhere herein.

GOVERNMENT REGULATION

HEALTH CARE REFORM. The health care industry is facing various
challenges, including increased government and private payor pressure on health
care providers to control costs, the migration of patients from acute care
facilities into extended care and home care settings, the vertical and
horizontal consolidation of health care providers and financing concerns. The
pressure to control health care costs intensified during 1993 and 1994 as a
result of the national health care reform debate. The focus on health care
expenditures is expected to continue notwithstanding the adoption by the 105th
Congress of the first balanced federal budget since 1969 and significant reforms
enacted as part of the Balanced Budget Act of 1997 designed to slow the growth
rate in federal health care expenditures, including with particular focus on
limiting provider reimbursement. Further debate on overall structural reform of
federal and state health care programs is likely to result in additional
legislative action on cost-containment.

11

The Company believes that government and private efforts to contain
and reduce health care costs are likely to lead to reduced or slower growth
in reimbursement for certain services provided by some of the Company's
borrowers and lessees. The Company believes that the financial strength and
operating flexibility of its operators and the diversity of its portfolio
will mitigate the impact of any such diminution in reimbursement. However,
the Company cannot predict whether government or private cost contrainment
efforts and reform will be adopted, and if adopted, whether the
implementation of such reforms will have a material adverse effect on the
Company's financial condition or results of operations.

POTENTIAL OPERATOR LOSS OF LICENSURE OR CERTIFICATION. The health care
industry is highly regulated by federal, state and local law, and is directly
affected by state and local licensure, fines, and loss of certification to
participate in the Medicare and Medicaid programs, as well as potential criminal
penalties. The failure of any borrower or lessee to comply with such laws,
requirements and regulations could affect its ability to operate the facility or
facilities and could adversely affect such borrower's or lessee's ability to
make debt or lease payments to the Company.

In the past several years, due to rising health care costs, there has
been an increased emphasis on detecting and eliminating fraud and abuse in the
Medicare and Medicaid programs. Payment of any consideration in exchange for
referral of Medicare and Medicaid patients is generally prohibited by federal
statute, which subjects violators to severe penalties, including exclusion from
the Medicare and Medicaid programs, fines, and even prison sentences. In recent
years, both federal and state governments have significantly increased
investigation and enforcement activity to detect and punish wrongdoers. In
addition, legislation has been adopted at both state and federal levels that
severely restricts the ability of physicians to refer patients to entities in
which they have a financial interest.

It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. In the event that any borrower or lessee were to
be found in violation of laws regarding fraud, abuse or self-referral, that
borrower's or lessee's ability to operate a health care facility could be
jeopardized, which could adversely affect the borrower's or lessee's ability to
make debt or lease payments to the Company and, thereby, adversely affect the
Company.

RELIANCE ON GOVERNMENT REIMBURSEMENT. A significant portion of the
revenue of the Company's borrowers and lessees is derived from
governmentally-funded reimbursement programs, such as Medicare and Medicaid.
These programs are highly regulated and subject to frequent and substantial
changes resulting from legislation, adoption of rules and regulations, and
administrative and judicial interpretations of existing law. In recent years,
there have been fundamental changes in the Medicare program which have resulted
in reduced levels of payment for a substantial portion of health care services.
Moreover, health care facilities have experienced increasing pressures from
private payers attempting to control health care costs, and reimbursement from
private payers has in many cases effectively been reduced to levels approaching
those of government payers.

In many instances, revenues from Medicaid programs are already
insufficient to cover the actual costs incurred in providing care to those
patients. Governmental and popular concern regarding health care costs may
result in significant reductions in payment to health care facilities, and there
can be no assurance that future payment rates for either governmental or private
health care plans will be sufficient to cover cost increases in providing
services to patients. Any changes in reimbursement policies which reduce
reimbursement to levels that are insufficient to cover the cost of providing
patient care could adversely affect revenues of the Company's borrowers and
lessees and thereby adversely affect those borrowers' and lessees' abilities to
make their debt or lease payments to the Company. Failure of the borrowers or
lessees to make their debt or lease payments would have a direct and material
adverse impact on the Company.

12

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws,
ordinances and regulations, an owner of real property or a secured lender
(such as the Company) may be liable in certain circumstances for the costs of
removal or remediation of certain hazardous or toxic substances at, under or
disposed of in connection with such property, as well as certain other
potential costs relating to hazardous or toxic substances (including
government fines and damages for injuries to persons and adjacent property).
Such laws often impose such liability without regard to whether the owner
knew of, or was responsible for, the presence or disposal of such substances
and may be imposed on the owner in connection with the activities of an
operator of the property. The cost of any required remediation, removal,
fines or personal or property damages and the owner's liability therefore
could exceed the value of the property, and/or the assets of the owner. In
addition, the presence of such substances, or the failure to properly dispose
of or remediate such substances, may adversely affect the owner's ability to
sell or rent such property or to borrow using such property as collateral
which, in turn, would reduce the Company's revenues.

Although the Company's mortgage loans and leases require the borrower
and the lessee to indemnify the Company for certain environmental liabilities,
the scope of such obligations may be limited and there can be no assurance that
any such borrower or lessee would be able to fulfill its indemnification
obligations.

HEALTH CARE REAL ESTATE INVESTMENT RISKS

VOLATILITY OF VALUE OF REAL ESTATE. Real property investments in the
health care industry are subject to varying degrees of risk. The economic
performance and values of health care real estate can be affected by many
factors including governmental regulation, economic conditions, and demand for
health care services. There can be no assurance that the value of any property
acquired by the Company will appreciate or that the value of property securing
any of the Company's mortgage loans or any property acquired by the Company will
not depreciate.

VOLATILITY OF INCOME AND RETURNS. The possibility that the health care
facilities will not generate income sufficient to meet operating expenses, will
generate income and capital appreciation, if any, at rates lower than those
anticipated or will yield returns lower than those available through investments
in comparable real estate or other investments are additional risks of investing
in health care related real estate. Income from properties and yields from
investments in such properties may be affected by many factors, including
changes in governmental regulation (such as zoning laws), general or local
economic conditions (such as fluctuations in interest rates and employment
conditions), the available local supply of and demand for improved real estate,
a reduction in rental income as the result of an inability to maintain occupancy
levels, natural disasters (such as earthquakes and floods) or similar factors.


ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Real estate investments are
relatively illiquid and, therefore, tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. All of the Company's properties are "special purpose" properties
that could not be readily converted to general residential, retail or office
use. Transfers of operations of nursing homes and other health care-related
facilities are subject to regulatory approvals not required for transfers of
other types of commercial operations and other types of real estate. Thus, if
the operation of any of the Company's properties becomes unprofitable due to
competition, age of improvements or other factors such that the borrower or
lessee becomes unable to meet its obligations on the debt or lease, the
liquidation value of the property may be substantially less -- relative to the
amount owing on the mortgage loan -- than would be the case if the property were
readily adaptable to other uses. The receipt of liquidation proceeds could be
delayed by the approval process of any state agency necessary for the transfer
of the property. In addition, certain significant expenditures associated with
real estate investment (such as real estate taxes and

13

maintenance costs) are generally not reduced when circumstances cause a
reduction in income from the investment. Should such events occur, the
Company's income and funds available for distribution would be adversely
affected.

UNINSURED LOSS. The Company currently requires, and it is the
intention of the Company to continue to require, all borrowers and lessees to
secure adequate comprehensive property and liability insurance that covers
the Company as well as the borrower and/or lessee. Certain risks may,
however, be uninsurable or not economically insurable and there can be no
assurance the Company or a lessee will have adequate funds to cover all
contingencies itself. Should such an uninsured loss occur, the Company could
lose its invested capital.

DEPENDENCE ON LEASE INCOME AND MORTGAGE PAYMENTS FROM REAL PROPERTY.
Since a substantial portion of the Company's income is derived from mortgage
payments and lease income from real property, the Company's income would be
adversely affected if a significant number of the Company's borrowers were
unable to meet their obligations to the Company or if the Company were unable to
lease its properties or make mortgage loans on economically favorable terms.
There can be no assurance that any lessee will exercise its option to renew its
lease upon the expiration of the initial term or that if such failure to renew
were to occur, the Company could lease the property to others on favorable
terms.

14

ITEM 2. PROPERTIES

INVESTMENT PORTFOLIO

As of December 31, 1997, the Company's real estate investment portfolio
consisted of investments in 274 skilled nursing facilities with 31,462 beds and
77 assisted living facilities with 3,281 units in 34 states. The Company had
approximately $318,870,000 (before accumulated depreciation of $20,042,000)
invested in long-term care facilities owned by the Company and leased to
operators, approximately $255,094,000 invested in mortgage loans (before
allowance for doubtful accounts of $1,000,000), and approximately $87,811,000,
at estimated fair value, ($81,365,000 at amortized cost) invested in REMIC
Certificates.

Skilled nursing facilities provide restorative, rehabilitative and
nursing care for people not requiring the more extensive and sophisticated
treatment available at acute care hospitals. Many skilled nursing facilities
provide ancillary services that include occupational, speech, physical,
respiratory and IV therapies, as well as provide sub-acute care services. Such
services are paid either by the patient or the patient's family, or through the
federal Medicare or state Medicaid programs. Assisted living facilities serve
elderly persons who require assistance with activities of daily living, but do
not require the constant supervision skilled nursing facilities provide.
Services are generally available 24-hours a day and include personal supervision
and assistance with eating, bathing, grooming and administering medication. The
facilities provide a combination of housing, supportive services, personalized
assistance and health care designed to respond to individual needs.

15


OWNED PROPERTIES. At December 31, 1997, the Company owned and leased to
health care operators 57 skilled nursing facilities with a total of 7,228 beds
and 57 assisted living facilities with a total of 2,205 units in 22 states,
representing a net investment of approximately $298,828,000. These long-term
care facilities are leased pursuant to non-cancelable leases generally with an
initial term of ten to twelve years. Many of the leases contain renewal options
and some contain options that permit the operators to purchase the facilities.

The following table sets forth certain information regarding the
Company's owned properties as of December 31, 1997:




No. of Avg Remaining
No. of No. of Beds Lease Term Purchase Current Annual
Location SNFs ALFs /Units Encumbrances (in Months) Price Rent Payments
- ---------------------------------------------------------------------------------------------------------------------------

Alabama 8 1 912 $14,506,000 83 $29,288,000 $3,357,000
Arizona 4 2 873 21,736,000 84 29,960,000 3,650,000
California 4 535 75 9,547,000 1,057,000
Colorado 3 142 132 8,285,000 792,000
Florida 9 1,116 90 39,064,000 4,142,000
Georgia 1 100 125 2,500,000 255,000
Idaho 4 148 138 9,756,000 957,000
Illinois 1 148 84 6,627,000 747,000
Indiana 2 78 150 5,070,000 486,000
Iowa 6 448 10,496,000 24 9,402,000 1,095,000
Kansas 3 4 290 5,551,000 87 8,400,000 956,000
Montana 1 278 4,285,000 60 3,830,000 420,000
Nebraska 4 156 138 9,332,000 955,000
New Jersey 1 39 144 2,925,000 291,000
New Mexico 2 236 60 6,899,000 786,000
Ohio 6 233 142 15,116,000 1,472,000
Oklahoma 6 221 116 11,203,000 1,100,000
Oregon 1 3 212 115 9,318,000 969,000
Tennessee 2 224 125 5,550,000 566,000
Texas 10 13 2,104 3,150,000 93 60,826,000 6,578,000
Virginia 3 443 93 11,013,000 1,242,000
Washington 2 8 497 10,677,000 182 24,959,000 2,484,000
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL 57 57 9,433 $70,401,000(1) $318,870,000(2) $34,357,000
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------


- ---------------
1. The amounts comprising the $70,401,000 of encumbrances include: i)
$56,785,000 of non-recourse mortgages payable by the Company secured by
23 skilled nursing facilities containing a total of 2,808 beds, ii)
$8,065,000 of tax-exempt bonds secured by 5 assisted living facilities
in Washington with 184 units, and iii) $5,551,000 of capital lease
obligations on 4 assisted living facilities in Kansas with 134 units.

2. Of the total purchase price, $191,897,000 relates to investments in 57
SNFs with 7,228 beds and $126,973,000 relates to investments in 57 ALFs
with 2,205 units.

The leases provide for a fixed minimum base rent during the initial and
renewal periods. Most of the leases provide for annual fixed rent increases or
increases based on consumer price indices over the term of the lease. In
addition, certain of the Company's leases provide for additional rent through
revenue participation (as defined in the lease agreement) in incremental
revenues generated by the facilities, over a defined base period, effective at
various times during the term of the lease. Each lease is a triple net lease
which requires the lessee to pay additional charges including all taxes,
insurance, assessments, maintenance and repair (capital and non-capital
expenditures), and other costs necessary in the operation of the facility.

16

MORTGAGE LOANS. At December 31, 1997, the Company had 103 mortgage
loans secured by first mortgages on 101 skilled nursing facilities with a total
of 11,766 beds and 20 assisted living residences with 1,076 units located in 25
states. The mortgage loans have current interest rates ranging from 9.00% to
14.32% generally have 25-year amortization schedules, have balloon payments due
from 1998 to 2018 and provide for certain facility fees. Almost all of the
mortgage loans provide for annual increases in the interest rate based upon a
specified increase of 10 to 12.5 basis points.

The following table sets forth certain information regarding the
Company's mortgage loans as of December 31, 1997:



Average
No. of No. of Number of
No. of ALFs Beds Interest Months to Face Amount of Current Amount of Current Annual
Location SNFs /Units /Units Rate % Maturity Mortgage Loans Mortgage Loans Debt Service (1)
- ----------------------------------------------------------------------------------------------------------------------------------

Alabama 1 142 11.28% 88 $ 4,100,000 $ 4,029,000 $ 461,000
Arizona 2 1 479 10.71-11.80% 75 10,650,000 10,527,000 1,169,000
Arkansas 2 274 10.13-10.33% 159 3,400,000 3,303,000 340,000
California 14 1,732 9.05-13.30% 140 28,621,000 28,195,000 2,867,000
Colorado 6 2 695 10.13-12.22% 107 16,585,000 14,379,000 1,587,000
Florida 10 6 1,687 9.28-11.95% 111 54,882,000 48,463,000 5,234,000
Georgia 5 2 697 9.88-11.28% 105 17,900,000 17,767,000 1,951,000
Illinois 2 322 9.86-11.20% 94 6,200,000 6,162,000 626,000
Iowa 6 650 11.05-11.85% 151 12,100,000 11,993,000 1,363,000
Kansas 1 77 12.00% 96 1,200,000 1,186,000 144,000
Louisiana 1 127 11.02% 227 1,600,000 1,581,000 177,000
Mississippi 3 400 10.32% 105 11,250,000 11,197,000 1,172,000
Missouri 2 274 9.35-11.00% 77 4,301,000 4,425,000 468,000
Montana 2 163 11.22% 113 5,600,000 5,579,000 626,000
Nebraska 2 1 236 9.00-14.32% 94 6,100,000 6,032,000 664,000
Nevada 1 100 10.50% 151 1,200,000 1,152,000 121,000
North Carolina 2 5 411 10.00-10.80% 110 15,811,000 7,354,000 774,000
Ohio 1 150 10.29% 99 5,200,000 5,131,000 535,000
Oklahoma 1 161 11.03% 162 1,300,000 1,272,000 140,000
Oregon 2 161 9.86% 102 1,610,000 1,601,000 158,000
South Carolina 5 3 637 10.50-11.90% 114 18,223,000 13,080,000 1,549,000
Tennessee 6 566 9.05-11.38% 140 17,936,000 16,834,000 1,832,000
Texas 19 2,276 9.55-11.70% 160 27,765,000 27,236,000 2,891,000
Washington 4 310 11.25-11.80% 156 4,500,000 4,437,000 511,000
Wisconsin 1 115 11.00% 230 2,200,000 2,179,000 243,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 101 20 12,842 $280,234,000 $255,094,000(2) $27,603,000
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------


- ---------------
(1) Includes principal and interest payments.

(2) Of the total current principal balance, $227,674,000 and $27,420,000
relates to investments in SNFs and ALFs, respectively.

In general, the Company's mortgage loans may not be prepaid except
in the event of the sale of the collateral facility to a third party that is
not affiliated with the borrower, although partial prepayments (including the
prepayment premium) are often permitted where a mortgage loan is secured by
more than one facility upon a sale of one or more, but not all, of the
collateral facilities to a third party which is not an affiliate of the
borrower. The Company's mortgage loans generally impose a premium upon
prepayment of the loans depending upon the period in which the prepayment
occurs, whether such prepayment was permitted or required, and certain other
conditions such as upon the sale of the facility under pre-existing purchase
option, destruction or condemnation, or other circumstances as approved by
the Company. On certain loans, such prepayment amount is based upon a
percentage of the then outstanding balance of the loan, usually declining
ratably each year. For other loans, the prepayment premium is based on a
yield maintenance formula. In addition to a lien on the mortgaged property,
the loans are generally secured by certain non-real estate assets of the
facilities and contain certain other security provisions in the form of
letters of credit, pledged collateral accounts, security deposits,
cross-default and cross-collateralization features and certain guarantees.

17

REMIC CERTIFICATES. At December 31, 1997, the estimated fair value
of the Company's REMIC Certificate investments was $87,811,000 ($81,365,000,
at amortized cost). The REMIC Certificates retained by the Company are
subordinate in rank and right of payment to the Certificates sold to
third-party investors and as such would bear the first risk of loss in the
event of an impairment to any of the underlying mortgages. Management
believes it employs conservative underwriting policies and to date there have
been no credit losses on any of the mortgages underlying the Certificates nor
are any credit losses currently anticipated. The REMIC Certificates are
collateralized by three pools consisting of 81 first mortgage loans secured
by 139 skilled nursing facilities with a total of 15,276 beds in 23 states.
Each mortgage loan, all of which were originated by the Company, is evidenced
by a promissory note and secured by a mortgage, deed of trust, or other
similar instrument that creates a first mortgage lien on a fee simple estate
in real property (a "Mortgaged Property"). The $266,615,000 current principal
amount of mortgage loans represented by the REMIC Certificates have a
weighted average interest rate of approximately 11.29%, and scheduled
maturities ranging from 1999 to 2015.

The following table sets forth certain information regarding the
three pools of mortgage loans securing the REMIC Certificates as of December
31, 1997:




Original Principal Current Principal
Number of Number of Amount of Remaining Amount of Remaining Current Annual
Location Facilities Beds Mortgage Loans Mortgage Loans(1) Debt Service
- ----------------------------------------------------------------------------------------------------------------------------------

Alabama 8 1,069 $ 18,426,000 $ 17,951,000 $ 2,138,000
Arizona 5 955 26,018,000 25,470,000 2,623,000
California 15 1,613 25,755,000 23,526,000 2,740,000
Connecticut 4 499 10,656,000 10,394,000 1,218,000
Florida 3 330 13,160,000 12,747,000 1,411,000
Georgia 10 1,078 20,822,000 20,409,000 2,352,000
Illinois 6 679 12,426,000 12,045,000 1,392,000
Iowa 10 750 13,531,000 13,688,000 1,401,000
Kansas 1 66 1,200,000 1,182,000 132,000
Kentucky 1 67 726,000 707,000 85,000
Michigan 3 444 6,800,000 6,628,000 765,000
Mississippi 1 120 2,800,000 2,753,000 314,000
Missouri 5 545 9,489,000 9,240,000 1,109,000
Montana 5 658 14,278,000 13,956,000 1,421,000
Nebraska 4 378 6,614,000 6,440,000 734,000
New Mexico 5 350 9,007,000 8,597,000 968,000
North Carolina 2 256 5,350,000 5,148,000 582,000
Ohio 3 243 7,000,000 6,624,000 705,000
Oklahoma 1 112 1,300,000 1,241,000 146,000
S. Dakota 1 50 585,000 571,000 61,000
Tennessee 4 297 6,952,000 6,832,000 775,000
Texas 38 4,428 58,280,000 55,992,000 6,512,000
Washington 4 289 4,583,000 4,474,000 519,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 139 15,276 $275,758,000 $266,615,000 $30,103,000
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------


- ---------------
(1) Included in the balances of the mortgages underlying the REMIC
Certificates are $56,785,000 of non-recourse mortgages payable by the
Company. These mortgages were originated by the Company and were
transferred to the REMIC. Subsequently, the properties securing the
mortgages were acquired by the Company in unrelated transactions,
subject to the related mortgage debt. The properties and the mortgage
debt are reflected in the Company's balance sheet.

Such mortgage loans generally have 25-year amortization schedules with
balloon payments due from 1999 to 2015, unless prepaid prior thereto.
Contractual principal and interest distributions with respect to the $81,365,000
amortized cost basis of REMIC Certificates (excluding unrealized gains on
changes in estimated fair value of $6,446,000) retained by the Company are
subordinated to distributions of interest and principal

18

with respect to the $191,815,000 of REMIC Certificates held by third parties.
Thus, based on the terms of the underlying mortgages and assuming no
unscheduled prepayments occur, contractual principal reductions on the REMIC
Certificates retained by the Company will commence in August 2004 with final
maturity in April 2015. Distributions on any of the REMIC Certificates will
depend, in large part, on the amount and timing of payments, collections,
delinquencies and defaults with respect to the mortgage loans represented by
the REMIC Certificates, including the exercise of certain purchase options
under existing facility leases or the sale of the Mortgaged Properties. Each
of the mortgage loans securing the REMIC Certificates contain similar
prepayment and certain security provisions with respect to the Company's
mortgage loans.

As part of the REMIC transactions discussed above, the Company
serves as the sub-servicer and, in such capacity, is responsible for
performing substantially all of the servicing duties relating to the mortgage
loans represented by the REMIC Certificates. The Company receives monthly
fees equal to a fixed percentage of the then outstanding mortgage loans in
the REMIC which, in management's opinion, represent currently prevailing
terms for similar transactions. Because the fees received for such servicing
result in only adequate compensation after considering the costs to service
the loans, the Company does not recognize a separate asset for servicing
rights. In addition, the Company will act as the special servicer to
restructure any mortgage loans in the REMIC that default.

At December 31, 1997, the REMIC Certificates held by the Company
have an effective interest rate of approximately 16.7% based on the expected
future cash flows with no unscheduled prepayments.

MAJOR OPERATORS

As of December 31, 1997, Retirement Care Associates, Inc. ("RCA"),
Integrated Health Services, Inc. ("IHS"), Sun Healthcare Group, Inc. ("Sun")
and ALC operated, on a combined basis, 118 facilities representing 39.5%
($309.5 million) of the Company's adjusted gross real estate investment
portfolio (adjusted to include the mortgage loans to third parties underlying
the investment in REMIC Certificates). At December 31, 1997, RCA, IHS, Sun
and ALC operated 40, 16, 26 and 36, facilities, respectively, representing
approximately 14.1% ($110.2 million), 7.3% ($57.5 million), 7.2% ($56.5
million) and 10.9% ($85.3 million), respectively, of the Company's adjusted
gross portfolio. If the proposed merger between Sun and RCA is completed, the
combined entity will own 66 facilities representing 21.3% ($166.7 million) of
the Company's adjusted gross portfolio. RCA, IHS, Sun and ALC are publicly
traded companies, and other information regarding these operators is on file
with the Securities and Exchange Commission. The financial position of the
Company and its ability to make distributions may be adversely affected by
financial difficulties experienced by any of such operators, or any other
major operator of the Company, including bankruptcy, insolvency or general
downturn in business of any such operator, or in the event any such operator
does not renew and/or extend its relationship with the Company or its
borrowers as it expires.

19



Item 3. LEGAL PROCEEDINGS

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 4A. EXECUTIVE OFFICERS




Name Age Position
- ------------------------------ ---- --------

Andre C. Dimitriadis 57 Chairman, Chief Executive Officer and Director
James J. Pieczynski 35 President, Chief Financial Officer, and Director
Pamela J. Privett 40 Senior Vice President and General Counsel
Christopher T. Ishikawa 34 Senior Vice President and Chief Investment Officer


Mr. Dimitriadis founded the Company in 1992 and was employed by
Beverly Enterprises, Inc., an owner/operator of long-term care facilities,
retirement living facilities and pharmacies, from October 1989 to May 1992,
where he served as Executive Vice President and Chief Financial Officer.
Prior to that, he was employed by American Medical International, Inc., an
owner/operator of hospitals, from 1985 to 1989, where he served as Executive
Vice President - Finance, Chief Financial Officer and Director. Mr.
Dimitriadis is a member of the board of Magellan Health Services.

Mr. Pieczynski has served as President and Director since September
8, 1997 and Chief Financial Officer of the Company since May 1994. From May
1994 to September 1997, he also served as Senior Vice President of the
Company. He joined the Company in December 1993 as Vice President and
Treasurer. Prior to that, he was employed by American Medical International,
Inc., an owner/operator of hospitals, from May 1990 to December 1993, where
he served as Assistant Controller and Director of Development.

Ms. Privett has held the position of Senior Vice President and
General Counsel of the Company since September 8, 1997. Prior to that, Ms.
Privett was the sole owner, officer and director of Pamela J. Privett, A
Professional Law Corporation, which served as outside General Counsel to the
Company beginning in August 1994. Ms. Privett was a shareholder in the Santa
Monica, California law firm of Stern, Neubauer, Greenwald & Pauly. Ms.
Privett began her legal career in 1985 at the Washington, D.C. office of
Casson, Calligaro & Mutryn, a health care law boutique and she remained with
the Casson firm until joining Stern, Neubauer, Greenwald & Pauly in 1990.

Mr. Ishikawa has served as Senior Vice President and Chief
Investment Officer since September 8, 1997. Prior to that, he served as the
Vice President and Treasurer of the Company since April 1995. Prior to
joining the Company, he was employed by MetroBank from December 1991 to March
1995, where he served as First Vice President and Controller. From December
1989 to November 1991, he was employed by Mercantile National Bank where he
served as Assistant Treasurer.

20

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

a. The Company's common stock is listed on the New York Stock Exchange.
Set forth below are the high and low reported sale prices for the
Company's common stock as reported on the New York Stock Exchange.



PRICE PER SHARE
HIGH LOW
---- ---

1997
First Quarter $18.625 $16.625
Second Quarter 18.25 16.125
Third Quarter 19.3125 18.00
Fourth Quarter 21.50 18.8125

1996
First Quarter $17.125 $14.875
Second Quarter 16.625 15.125
Third Quarter 17.250 15.875
Fourth Quarter 18.875 16.250


(b) As of December 31, 1997, there were approximately 875 stockholders
of record of the Company's common stock.

(c) The Company has declared total cash distributions for 1997 and 1996
as set forth below:




DISTRIBUTIONS DECLARED
PER SHARE
----------------------

1997
Quarter ended March 31 $ .34
Quarter ended June 30 .365
Quarter ended September 30 .365
Quarter ended December 31 .365
------
$1.435
------
1996
Quarter ended March 31 $ .315
Quarter ended June 30 .34
Quarter ended September 30 .34
Quarter ended December 31 .34
------
$1.335
------


The Company intends to distribute to its stockholders a majority of its
funds from operations and, in any event, an amount at least sufficient to
satisfy the distribution requirements of a REIT. Cash flows from operating
activities available for distribution to stockholders will be derived primarily
from interest and rental payments from its real estate investments. All
distributions will be made by the Company subject to approval of the Board of
Directors and will depend on the earnings of the Company, its financial
condition and such other factors as the Board of Directors deem relevant. In
order to qualify for the beneficial tax treatment accorded to REITs by Sections
856 through 860 of the Code, the Company is required to make distributions to
holders of its shares equal to at least 95% of the Company's "REIT taxable
income."

21


ITEM 6. SELECTED FINANCIAL INFORMATION

The following table of selected financial information should be read
in conjunction with the Company's financial statements and related notes
thereto included elsewhere in this Annual Report on Form 10-K.




(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1997 1996 1995 1994 1993
-------- --------- ---------- --------- ---------

OPERATING INFORMATION:
Revenues $ 73,434 $ 54,930 $ 35,569 $ 27,641 $ 15,847
Expenses:
Interest expense 23,795 20,604 9,407 6,563 6,400
Depreciation and amortization 9,132 6,298 3,072 1,781 799
Amortization of founders' stock 31 114 221 372 481
Provision for loan losses - - - 550 372
Minority interest 1,205 898 57 - -
Operating and other expenses 4,393 4,479 2,772 3,037 948
------- -------- -------- -------- --------
Total expenses
38,556 32,393 15,529 12,303 9,000
------- -------- -------- -------- --------
Other income (loss)
885 6,173 (1,656) 667 -
------- -------- -------- -------- --------
Income before cumulative effect of change in 35,763 28,710 18,384 16,005 6,847
accounting
Cumulative effect of accounting change - - 1,205 -
------- -------- -------- -------- --------
Net income 35,763 28,710 18,384 17,210 6,847
Preferred dividends (6,075) - - - -
------- -------- -------- -------- --------
Net income available to common stockholders $29,688 $28,710 $18,384 $17,210 $6,847
------- -------- -------- -------- --------
------- -------- -------- -------- --------

PER SHARE INFORMATION:
Basic net income before cumulative effect of
accounting change $ 1.26 $ 1.51 $ 1.02 $ 1.05 $ 0.76
Cumulative effect of change in method
of accounting for REMIC Certificates - - - 0.08 -
------- ------- ------- ------- ------
Basic net income $ 1.26 $ 1.51 $ 1.02 $ 1.13 $ 0.76
------- ------- ------- ------- ------
Diluted net income $ 1.25 $ 1.44 $ 1.01 $ 1.11 $ 0.75
------- ------- ------- ------- ------
Distributions declared (1) $ 1.435 $ 1.335 $ 1.21 $ 1.10 $ 1.02
------- ------- ------- ------- ------
------- ------- ------- ------- ------

BALANCE SHEET INFORMATION:
Real estate investments, net $640,733 $488,134 $340,441 $220,025 $147,269
Total assets 656,664 500,538 357,378 241,241 154,303
Total debt 249,724 283,472 174,083 55,835 61,804
Total liabilities 259,378 299,207 185,458 66,148 69,156
Minority interest 11,159 10,528 1,098 - -
Total stockholders' equity 386,127 190,803 170,822 175,093 85,147

OTHER INFORMATION:
Cash flows from operating activities $ 43,230 33,789 24,197 19,242 8,863
Cash flows (used in) investing activities (150,800) (90,317) (111,422) (73,546) (52,706)
Cash flows provided by (used in)
financing activities 109,396 58,242 74,393 65,465 (2,817)


(1) Distributions may exceed current or accumulated net income.


22

In March 1995, NAREIT adopted the following definition of Funds From
Operations ("FFO"): net income (computed in accordance with GAAP) excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation of real property and after adjustments for unconsolidated
entities in which a REIT holds an interest. In addition, the Company excludes
any unrealized gains or losses resulting from temporary changes in the
estimated fair value of its REMIC Certificates in the computation of FFO. The
Company implemented this new definition of FFO effective as of the
NAREIT-suggested adoption date of January 1, 1996. For the year ended
December 31, 1997, FFO was $38,735,000 ($1.57 per diluted share) representing
net income available to common shareholders of $29,688,000 ($1.44 per diluted
share) plus depreciation on real estate investments of $9,104,000 less
unrealized gain on its REMIC Certificate investments of $57,000. For the year
ended December 31, 1996, FFO was $28,793,000 representing net income of
$28,710,000 plus depreciation on real estate investments of $6,256,000, less
unrealized gains on its REMIC Certificate investments of $6,173,000.

The Company believes that FFO is an important supplemental measure of
operating performance. FFO should not be considered as an alternative to net
income or any other GAAP measurement of performance as an indicator of operating
performance or as an alternative to cash flows from operations, investing, and
financing activities as a measure of liquidity. The Company believes that FFO is
helpful in evaluating a real estate investment portfolio's overall performance
considering the fact that historical cost accounting implicitly assumes that the
value of real estate assets diminishes predictably over time. The term FFO was
designed by the REIT industry to provide useful supplemental information. FFO
provides an alternative measurement criteria, exclusive of certain non-cash
charges included in GAAP income, by which to evaluate the performance of such
investments. FFO, used by the Company in accordance with the NAREIT definition
may not be comparable to similarly entitled items reported by other REITs that
have not adopted the NAREIT definition.

23


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OPERATING RESULTS

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996

Revenues for the year ended December 31, 1997 increased by $18,504,000
or 34% to $73,434,000 from $54,930,000. The increase in revenues resulted
primarily from increased rental income of $10,273,000 and increased mortgage
interest income of $8,444,000. Rental income increased $5,932,000 as a result of
property acquisitions of $118,564,000 during 1997 and $4,530,000 as a result of
a full year's rental revenue from facilities acquired during 1996. Same-store
rental income increased $275,000 due to contingent rents and rental increases as
provided for in the lease agreements. Partially offsetting the above increases
in rental income was a decrease of $464,000 related to the sale of properties.
The increase in mortgage interest income resulted from the higher mortgage
investment base in 1997 as compared to 1996.

Total expenses for the year ended December 31, 1997, were 53% of total
revenues versus 59% for 1996. The decrease is due in large part to a reduction
in interest expense as a percentage of total revenues. The reduction in interest
expense is the result of the conversion of approximately $44,005,000 of
convertible subordinated debentures into common stock, lower interest rates and
the utilization of equity to fund financing activities during 1997. Depreciation
expense decreased slightly to 30% of rental income in 1997 compared to 31% of
rental income in 1996. Minority interest expense increased due to the inclusion
of a full years expense for the six partnerships formed during 1996.

During 1997, the estimated fair value of REMIC Certificates
increased $57,000 compared to an increase of $6,173,000 in 1996 resulting in
a significant decrease in other income. Also decreasing other income were
charges of $1,120,000 recognized in connection with the accelerated vesting
of 64,000 shares of restricted common stock and a non-cash impairment charge
of $1,866,000. Partially offsetting these decreases in other income were
gains of $1,015,000 on the sale of the Company's investment in Home and
Community Care, Inc. and $2,799,000 on the sale of real estate investments.

During 1997, the Company declared dividends of $5,913,000 on its
Series A Cumulative Preferred Stock issued in March 1997 and a partial
dividend of $162,000 on its Series B Cumulative Preferred Stock issued in
December 1997.

As a result of the changes in revenues and expenses discussed above,
net income available to common shareholders increased $978,000 to $29,688,000 in
1997 from $28,710,000 in 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1995

Revenues for the year ended December 31, 1996 increased $19,361,000 or
54% to $54,930,000 from $35,569,000. The increase in revenues resulted from
increased rental income of $10,594,000, increased mortgage interest income of
$4,382,000 and increased interest income from REMIC Certificates of $3,480,000.
Rental income increased $7,375,000 as a result of $113,858,000 of property
acquisitions made in 1996 and by $3,011,000 as a result of a full year's effect
on rental revenue of facilities acquired during 1995. Rental revenue also
increased by $109,000 due to contingent rents received from certain facilities
based on increases in the facilities' incremental operating revenues (as defined
in the respective leases). Same-store rental income increased $99,000 as a
result of additional rents received in 1996 on facilities that are subject to
rental increases tied to increases in Consumer Price Indices (CPI). The increase
in mortgage interest income resulted from the higher overall mortgage investment
base in 1996 as compared to the 1995

24

investment base. Interest from REMIC Certificates increased as a result of
the third securitization transaction that closed in March 1996. The remaining
increase in income of $905,000 was primarily due to penalties the Company
received in 1996 from prepayments of one mortgage loan and eight loans
underlying the REMIC Certificates held by the Company.

Total expenses for the year ended December 31, 1996 were 59% of total
revenues versus 44% in 1995. The significant increase was primarily due to
financing activities in the latter part of 1995 and 1996 that utilized more debt
than equity. During 1996, $60,000,000 in convertible debentures was issued (of
which $18,813,000 converted into common stock prior to December 31, 1996) and
bank borrowings and mortgage financing increased by $30,930,000 and $37,498,000,
respectively. As a result, interest expense increased approximately $11,197,000.
Investments funded with these borrowings generally resulted in lower spreads as
a result of market interest rate pressures when compared to investments made in
prior years. Depreciation and amortization expense remained flat at 31% of
rental income. The increase in minority interest expense was primarily the
result of the formation six partnerships in 1996. Operating and other expenses
increased primarily due to higher salaries and bonuses paid to existing staff
during 1996.

During 1996, the Company recognized an unrealized holding gain on the
change in estimated fair value of the REMIC Certificates of $6,173,000 compared
to a loss on the change in estimated fair value of $1,656,000 during 1995. The
increase in estimated fair value resulted from the completion of a third
securitization transaction in March 1996. The estimated fair value of the
Company's investment in REMIC Certificates was $6,389,000 greater than their
unamortized cost basis as of December 31, 1996.

As a result of the foregoing, net income for the year ended December
31, 1996 increased $10,326,000 over the same period a year earlier.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1997, the Company had investments in 274 skilled
nursing facilities with a total of 31,462 beds and 77 assisted living residences
with a total of 3,281 units in 34 states. The Company's real estate investment
portfolio consisted of approximately $318,870,000 (before accumulated
depreciation of $20,042,000) invested in long-term care facilities owned by the
Company and leased to operators, $255,094,000 (excluding allowance for doubtful
accounts of $1,000,000) invested in mortgage loans and $87,811,000 invested in
REMIC Certificates at estimated fair value ($81,365,000 at unamortized cost
basis).

During 1997, the Company completed net investments totaling
approximately $183,851,000. These investments consisted of the purchase of 40
long-term care facilities for approximately $90,874,000 and the origination of
mortgage loans of $92,977,000 net of the sale of 12 properties sold back to
Assisted Living Concepts for $27,690,000 and the repayment of mortgage loans
originated in 1997 of $14,510,000. The Company financed its investments through
equity offerings with total net proceeds of $156,665,000, the sale of a portion
of its rated subordinated REMIC Certificates for proceeds of $11,811,000,
additional borrowings and cash from operations. During 1997, the Company
completed several public stock offerings whereby 2,000,000 shares of common
stock were issued for net proceeds of $35,065,000 and 3,080,000 shares of 9.5%
Series A Cumulative Preferred Stock and 2,000,000 shares of 9.0% Series B
Cumulative Preferred Stock were issued for total net proceeds of $121,600,000.

In September 1995, the Company entered into a seven year forward
interest rate swap agreement that has been extended and is scheduled to be
settled on June 30, 1998. Under this agreement, the Company is credited
interest semi-annually at the six month LIBOR and incurs interest
semi-annually at a fixed rate of 6.655% on a notional amount of $60,000,000.
In August 1997, the Company entered into a Treasury lock agreement that has
been extended and is scheduled to be settled by April 30, 1998. Under this
agreement,

25

the Company locked into a rate of 6.484% on the seven year Treasury Note Rate
on a notional amount of $65,000,000. Upon settlement of the Treasury lock
agreement the Company will either receive or make a payment based on the
change in the seven year Treasury Note Rate. The interest rate swap and the
Treasury lock agreements are accounted for as hedges and were entered into to
minimize the Company's exposure to interest rate risk on mortgage loans that
the Company intends to transfer to a REMIC trust. The fair value of mortgage
loans may vary with changes in interest rates.

Notional amounts do not represent amounts exchanged with other
parties and thus are not a measure of the Company's exposure to loss through
its use of these agreements. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the agreements.

During 1997, the Company replaced its existing credit facilities with a
$170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit
Facility") which expires on October 3, 2000. The Revolving Credit Facility
pricing varies between LIBOR plus 1.25% and LIBOR plus 1.5% depending on the
Company's leverage ratio. Currently the pricing is LIBOR plus 1.375%. The
Revolving Credit Facility contains financial covenants including, but not
limited to, maximum leverage ratios, minimum debt service coverage ratios, cash
flow coverage ratios and minimum consolidated tangible net worth. As of December
31, 1997, the Company had $87,500,000 in borrowings outstanding under its
Revolving Credit Facility.

Subsequent to December 31, 1997, the Company acquired six skilled
nursing facilities and three assisted living residences for approximately
$31,000,000. Five of the skilled nursing facilities were purchased subject to
mortgage loans of approximately $7,000,000. As of March 20, 1998, the Company
had outstanding commitments aggregating approximately $242,250,000. Of the
outstanding commitments, $50,000,000 expire in 1999 and $50,000,000 expire in
2000.

The Company expects its future income and ability to make
distributions from cash flows from operations to depend on the collectibility
of its mortgage loans receivable, REMIC Certificates and rents. The
collection of these loans, certificates and rents will be dependent, in large
part, upon the successful operation by the operators of the skilled nursing
and assisted living facilities owned by or pledged to the Company. The
operating results of the facilities will depend on various factors over which
the operators/owners may have no control. Those factors include, without
limitation, the status of the economy, changes in supply of or demand for
competing long-term care facilities, ability to control rising operating
costs, and the potential for significant reforms in the long-term care
industry. In addition, the Company's future growth in net income and cash
flow may be adversely impacted by various proposals for changes in the
governmental regulations and financing of the long-term care industry. The
Company cannot presently predict what impact these proposals may have, if
any. The Company believes that an adequate provision has been made for the
possibility of loans proving uncollectible but will continually evaluate the
status of the operations of the skilled nursing and assisted living
facilities, the Company's borrowers and the underlying collateral for
mortgage loans and make future revisions to the provision, if considered
necessary.

The Company's investments, principally its investments in mortgage
loans, REMIC Certificates, and owned properties, are subject to the possibility
of loss of their carrying values as a result of changes in market prices,
interest rates and inflationary expectations. The effects on interest rates may
affect the Company's costs of financing its operations and the fair market value
of its financial assets. The Company generally makes loans which have
predetermined increases in interest rates and leases which have agreed upon
annual increases. Inasmuch as the Company initially funds its investments with
its Revolving Credit Facility, the Company is at risk of net interest margin
deterioration if medium and long-term rates were to increase between the time
the Company originates the investment and the time it securitizes the loans or
replaces the short-term variable rate borrowings with a fixed rate financing. To
help reduce the negative impact of changes in interest rates, the

26

Company partially hedges, or locks in, its net interest rate spread on its
investments with interest rate swaps, as previously described.

The REMIC Certificates retained by the Company are subordinate in
rank and right of payment to the certificates sold to third-party investors
and as such would bear the first risk of loss in the event of an impairment
to any of the underlying mortgages. The returns on the Company's investment
in REMIC Certificates are subject to certain uncertainties and contingencies
including, without limitation, the level of prepayments, estimated future
credit losses, prevailing interest rates, and the timing and magnitude of
credit losses on the underlying mortgages collateralizing the securities that
are a result of the general condition of the real estate market or long-term
care industry. As these uncertainties and contingencies are difficult to
predict and are subject to future events that may alter management's
estimations and assumptions, no assurance can be given that current yields
will not vary significantly in future periods. To minimize the impact of
prepayments, the mortgage loans underlying the REMIC Certificates generally
prohibit prepayment unless the property is sold to an unaffiliated third
party (with respect to the borrower). Management believes it employs
conservative underwriting policies and to date there have been no credit
losses on any of the mortgages underlying the certificates nor are any credit
losses currently anticipated.

Certain of the Certificates retained by the Company have designated
certificate principal balances and a stated certificate interest "pass-through"
rate. These Certificates are subject to credit risk to the extent that there are
estimated or realized credit losses on the underlying mortgages, and as such
their effective yield would be negatively impacted by such losses. The Company
also retains the interest-only (I/O) Certificates, which provide cash flow
(interest-only) payments that result from the difference between the interest
collected from the underlying mortgages and interest paid on all the outstanding
pass-through rate certificates. In addition to the risk from credit losses, the
I/O Certificates are also subject to prepayment risk, in that prepayments of the
underlying mortgages reduce future interest payments of which a portion flows to
the I/O Certificates, thus, reducing their effective yield. The Certificates'
fair values are estimated, in part, based on a spread over the applicable U.S
Treasury rate, and consequently, are inversely affected by increases or
decreases in such interest rates. There is no active market in these securities
from which to readily determine their value. The estimated fair values of both
classes of Certificates are subject to change based on the estimate of future
prepayments and credit losses, as well as fluctuations in interest rates and
market risk. Although the Company is required to report its REMIC Certificate
investments at fair value, many of the factors considered in estimating their
fair value are difficult to predict and are beyond the control of the Company's
management, consequently, changes in the reported fair values may vary widely
and may not be indicative of amounts immediately realizable if the Company was
forced to liquidate any of the Certificates.

The Company believes that its current cash flow from operations
available for distribution or reinvestment, its borrowing capacity, the pending
REMIC transaction and the Company's ability to access the capital markets are
sufficient to provide for payment of its operating costs, fund investments and
provide funds for distribution to its stockholders. In addition to its borrowing
capacity, the Company is considering various other proposals for additional
long-term financing to meet the needs of the Company.

YEAR 2000

The Company has evaluated its internal software and hardware and
believes the existing systems will function properly with respect to dates in
the year 2000 and beyond. The Company is currently assessing the extent to
which its operations are vulnerable should its borrowers, tenants or other
parties with which the Company conducts business fail to ensure their
computer systems are year 2000 compliant. The Company believes the year 2000
issue will not have a material adverse effect upon the Company's financial
position or results of operations.

27

STATEMENT REGARDING FORWARD LOOKING DISCLOSURE

Certain information contained in this report includes forward looking
statements, which can be identified by the use of forward looking terminology
such as "may", "will", "expect", "should" or comparable terms or negatives
thereof. These statements involve risks and uncertainties that could cause
actual results to differ materially from those described in the statements.
These risks and uncertainties include (without limitation) the following: the
effect of economic and market conditions and changes in interest rates,
government policy relating to the health care industry including changes in
reimbursement levels under the Medicare and Medicaid programs, changes in
reimbursement by other third party payors, the financial strength of the
operators of the Company's facilities as it affects the continuing ability of
such operators to meet their obligations to the Company under the terms of the
Company's agreements with its borrowers and operators, the amount and the timing
of additional investments, access to capital markets and changes in tax laws and
regulations affecting real estate investment trusts.



28



ITEM 8. FINANCIAL STATEMENTS



PAGE
----

Report of Independent Auditors........................................ 30

Consolidated Balance Sheets as of December 31, 1997 and 1996.......... 31

Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995................................... 32

Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995............................. 33

Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................... 34

Notes to Consolidated Financial Statements............................ 35



29

REPORT OF INDEPENDENT AUDITORS



The Board of Directors and Stockholders
LTC Properties, Inc.

We have audited the accompanying consolidated balance sheets of LTC
Properties, Inc. as of December 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the index at Item 14(a). These financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of LTC
Properties, Inc. at December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.



/s/ ERNST & YOUNG LLP



Los Angeles, California
January 20, 1998, except Note 11, as to
which the date is March 20, 1998


30

LTC PROPERTIES, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)



DECEMBER 31,
-------------------------
1997 1996
--------- ---------

ASSETS
Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and
amortization: 1997 - $20,042; 1996 - $11,640 $ 282,582 $199,591
Land 16,246 12,347
Mortgage loans receivable held for sale, net of allowance for doubtful accounts:
1997 - $1,000; 1996 - $1,000 254,094 177,262
REMIC Certificates at estimated fair value 87,811 98,934
--------- --------
Real estate investments, net 640,733 488,134
Other Assets:
Cash and cash equivalents 4,974 3,148
Debt issue costs, net 3,733 4,150
Interest receivable 3,862 2,817
Prepaid expenses and other assets 3,362 2,289
--------- --------
15,931 12,404
--------- --------
Total assets $ 656,664 $500,538
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures due 1999 - 2004 $ 91,823 $135,828
Bank borrowings 87,500 79,400
Mortgage loans payable 56,785 54,205
Bonds payable and capital lease obligations 13,616 14,039
Accrued interest 4,453 6,015
Accrued expenses and other liabilities 4,429 3,041
Distributions payable 772 6,679
--------- --------
Total liabilities 259,378 299,207

Minority interest 11,159 10,528

Commitments - -
Stockholders' equity:
Preferred stock $0.01 par value; 10,000,000
shares authorized; shares issued and outstanding:
1997 - 5,080,000; 1996 - none 127,000 -
Common stock $0.01 par value; 40,000,000
shares authorized; shares issued and outstanding:
1997 - 25,025,003; 1996 - 19,484,208 250 195
Capital in excess of par value 277,732 195,297
Cumulative net income 107,677 71,914
Notes receivable from stockholders (9,429) -
Cumulative distributions (117,103) (76,603)
--------- --------
Total stockholders' equity 386,127 190,803
--------- --------
Total liabilities and stockholders' equity $ 656,664 $500,538
--------- --------
--------- --------

See accompanying notes

31

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)



YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------- ---------- ----------

Revenues:
Rental income $30,802 $20,529 $ 9,935
Interest income from mortgage loans 25,942 17,498 13,116
Interest income from REMIC Certificates 14,189 14,383 10,903
Interest and other income 2,501 2,520 1,615
------- ------- -------
Total revenues 73,434 54,930 35,569
------- ------- -------
Expenses:
Interest expense 23,795 20,604 9,407
Depreciation and amortization 9,132 6,298 3,072
Amortization of Founders' stock 31 114 221
Minority interest 1,205 898 57
Operating and other expenses 4,393 4,479 2,772
------- ------- -------
Total expenses 38,556 32,393 15,529
------- ------- -------
Other income /(loss):
Unrealized holding gain/(loss) on changes in
estimated fair value of REMIC Certificates 57 6,173 (1,656)
Other income, net 828 -- --
------- ------- -------
Total other income, net 885 6,173 (1,656)
------- ------- -------
Net income 35,763 28,710 18,384

Preferred dividends 6,075 -- --
------- ------- -------
Net income available to common stockholders $29,688 $28,710 $18,384
------- ------- -------
------- ------- -------
Net Income Per Common Share:
Basic net income per common share $1.26 $1.51 $1.02
------- ------- -------
------- ------- -------
Diluted net income per common share $1.25 $1.44 $1.01
------- ------- -------
------- ------- -------


See accompanying notes

32


LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands, except per share amounts)



SHARES NOTES
------------------ CAPITAL IN RECEIVABLE
PREFERRED COMMON PREFERRED COMMON EXCESS OF CUMULATIVE FROM CUMULATIVE
STOCK STOCK STOCK STOCK PAR VALUE NET INCOME STOCKHOLDERS DISTRIBUTIONS
--------- ------- --------- ------ ---------- ---------- ------------ -------------

Balance December 31, 1994 - 17,658 $ - $177 $179,235 $ 24,820 $ - $(29,139)
Amortization of Founders' stock - - - - 221 - - -
Exercise of stock options - 2 - - 24 - - -
Conversion of debentures - 1,936 - 19 18,924 - - -
Repurchase of common stock - (1,299) - (13) (18,076) - - -
Repurchase of warrants - - - - (1,875) - - -
Net income - - - - - 18,384 - -
Common stock distributions - - - - - - - (21,879)
----- ------ -------- ---- -------- -------- ------- ---------
Balance December 31, 1995 18,297 183 178,453 43,204 - (51,018)
----- ------ -------- ---- -------- -------- ------- ---------
Amortization of Founders' stock - - - - 114 - - -
Exercise of stock options - 3 - - 39 - - -
Conversion of debentures - 1,304 - 13 18,521 - - -
Repurchase of common stock - (120) - (1) (1,830) - - -
Net income - - - - - 28,710 - -
Common stock distributions - - - - - - - (25,585)
----- ------ -------- ---- -------- -------- ------- ---------
Balance December 31, 1996 - 19,484 - 195 195,297 71,914 - (76,603)
----- ------ -------- ---- -------- -------- ------- ---------
Amortization of Founders' stock - - - - 31 - - -
Issuance of Series A
Preferred Stock 3,080 - 77,000 (3,200) - - -
Issuance of Series B
Preferred Stock 2,000 - 50,000 - (2,200) - - -
Issuance of common stock - 2,000 - 20 35,045 - - -
Exercise of stock options - 718 - 7 8,205 - (9,862) -
Payments on stockholder
notes receivable - - - - - - 433 -
Vesting of restricted
stock grants - 91 - 1 1,639 - - -
Conversion of debentures - 2,732 - 27 42,915 - - -
Net income - - - - - 35,763 - -
Preferred stock dividends - - - - - - - (6,075)
Common stock distributions - - - - - - - (34,425)
----- ------ -------- ---- -------- -------- ------- ---------
Balance December 31, 1997 5,080 25,025 $127,000 $250 $277,732 $107,677 $(9,429) $(117,103)
----- ------ -------- ---- -------- -------- ------- ---------
----- ------ -------- ---- -------- -------- ------- ---------



See accompanying notes

33

LTC PROPERTIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands)



YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
--------- ---------- ----------

OPERATING ACTIVITIES:
Net income $ 35,763 $ 28,710 $ 18,384
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,163 6,412 3,293
Unrealized holding (gain)/loss on
changes in estimated fair value
of REMIC Certificates (57) (6,173) 1,656
Gain on sale of real estate investments (2,799) - -
Gain on disposition of other assets (1,015) - -
Expense related to vesting of 1,120 - -
restricted stock
Non-cash impairment charge 1,866 - -
Other non-cash charges 1,832 1,883 1,942
(Increase) in interest receivable (1,204) (875) (741)
(Increase) in prepaid, other assets and allowance (1,249) (99) (285)
Increase (decrease) in accrued interest (1,562) 2,819 1,224
Increase (decrease) in accrued
expenses and other liabilities 1,372 1,112 (1,276)
--------- --------- ---------
Net cash provided by operating activities 43,230 33,789 24,197
INVESTING ACTIVITIES:
Investment in real estate mortgages (107,487) (99,440) (101,908)
Acquisitions of real estate properties, net (114,891) (95,285) (23,403)
Sale of real estate properties, net 29,004 7,589 -
Proceeds from sale of REMIC Certificates, net 11,811 86,674 19,216
Return of investment in unconsolidated affiliate 5,000 - -
Proceeds from sale of investments, net 1,015 - -
Principal payments on real estate mortgages 24,977 2,272 2,634
Restricted cash - 8,300 (8,300)
Other (229) (427) 339
--------- --------- ---------
Net cash used in investing activities (150,800) (90,317) (111,422)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures - 60,000 61,500
Proceeds from issuance of common stock, net 35,065 39 -
Proceeds from issuance of preferred stock, net 121,600 - -
Proceeds from issuance of bonds - - 8,300
Debt issue costs (1,877) (2,167) (2,409)
Repurchase of warrants - - (1,875)
Distributions paid (46,407) (24,670) (21,237)
Bank borrowings 445,032 219,000 133,220
Repayment of bank borrowings (436,932) (188,070) (84,750)
Principal payments on mortgage loans,
notes payable and capital lease obligations (5,869) (3,893) (37)
Repurchase of common stock - (1,831) (18,089)
Other (1,216) (166) (230)
--------- --------- ---------
Net cash provided by financing activities 109,396 58,242 74,393
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 1,826 1,714 (12,832)
Cash and cash equivalents, beginning of year 3,148 1,434 14,266
--------- --------- ---------
Cash and cash equivalents, end of year $ 4,974 $ 3,148 $ 1,434
--------- --------- ---------
--------- --------- ---------
Supplemental disclosure of cash flow information:
Interest paid $ 23,985 $ 16,631 $ 7,428


See accompanying notes

34

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. THE COMPANY

LTC Properties, Inc. (the "Company") was incorporated on May 12, 1992
in the State of Maryland and commenced operations on August 25, 1992. The
Company, which is organized as a real estate investment trust ("REIT"), invests
in long-term care facilities through mortgage loans, facility lease transactions
and other investments.


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The accompanying consolidated financial
statements include the accounts of the Company, its wholly-owned subsidiaries
and controlled partnerships. All intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have been made to
the prior periods financial statements to conform to the current year
presentation.

USE OF ESTIMATES. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments
with a maturity of three months or less and are stated at cost which
approximates market.

LAND, BUILDINGS AND IMPROVEMENTS. Land, buildings and improvements are
recorded at cost. Effective January 1, 1996, the Company adopted SFAS No. 121,
"ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF". Accordingly, impairment losses are recorded when events or
changes in circumstances indicate the carrying amount of an asset is greater
than its fair value. Undiscounted cash flows are used to determine the fair
value of an asset. Management assesses the recoverability of the
carrying value of its assets on a property by property basis. Depreciation is
provided on a straight-line basis over the estimated useful lives of the related
assets which range from 7 years for equipment to 40 years for buildings.

MORTGAGE LOANS RECEIVABLE. The Company maintains a long-term
investment interest in its mortgages either through the direct retention of
mortgages or through the retention of REMIC Certificates originated in the
Company's securitizations. The Company may, from time-to-time, securitize a
portion of its mortgage loan portfolio in transactions accounted for as
sales, when a securitization provides the Company with the best available
form of raising capital to make additional long-term investments.
Historically, the Company has sold its mortgages solely in connection with
its REMIC securitizations and does not anticipate selling any of its
mortgages other than in the course of completing future securitizations.
However, because portions of the Company's mortgage loan portfolio are
anticipated to be securitized in the future, the Company is required to
account for them under the provisions of SFAS No. 65, "ACCOUNTING FOR CERTAIN
MORTGAGE BANKING ACTIVITIES". SFAS No. 65 requires classification of the
mortgage loans receivable as held for sale and that they be accounted for at
the lower of cost-or-market.

In accordance with SFAS No. 65, mortgages that have not yet been
securitized are uncommitted mortgages until they have been accepted for
securitization by two independent rating agencies. In determining the
estimated market value for uncommitted mortgages, the Company considers
estimated prices and yields, which are based in part on a spread over the
applicable U.S.


35

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Treasury Note Rate, sought by qualified institutional buyers of the REMIC
Certificates originated in the Company's securitizations. As of December 31,
1997, the estimated market value of Company's mortgage loan investments, all
which are considered uncommitted mortgages, exceeded their amortized cost.
The Company determines the lower of cost or market of its mortgage loans on
an aggregate basis. To the extent that the aggregate cost basis exceeds the
aggregate market value, a valuation allowance is established with the
resulting amount included in the determination of net income. Changes in the
valuation allowance are included in current period earnings.

INVESTMENTS IN REMIC CERTIFICATES. REMIC Certificates are accounted
for under the fair value provisions of SFAS No. 115. Significant judgment is
used in estimating the REMIC Certificates' fair value since no ready market
exists. Management considers factors which affect the REMIC Certificates'
projected cash flows including, but not limited to, actual and estimated
prepayments, projected credit losses, if any, on the underlying mortgages, as
well as general economic and regulatory factors affecting the long-term care
industry and prevailing market interest rate conditions. Since many of these
factors are difficult to predict and are beyond the control of the Company's
management, changes in the reported fair values may vary widely and may not
be indicative of amounts immediately realizable if the Company were forced to
liquidate its investment in REMIC Certificates. Changes in the estimated fair
value of REMIC Certificates are recorded as a separate component of earnings.

MORTGAGE SERVICING RIGHTS. SFAS No. 125, "ACCOUNTING FOR TRANSFERS AND
SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES" requires the
recognition of a separate asset for the right to service mortgage loans acquired
through either the purchase or origination of mortgage loans. SFAS No. 125
requires that costs be allocated to servicing rights and the loans, based on
their relative fair values. At December 31, 1997, the Company sub-services 81
mortgage loans that are collateral for previous securitization transactions for
which the Company receives fees based on prevailing market rates for such
services at the time of each REMIC transaction. The Company does not recognize a
separate asset for servicing rights since the fees received for servicing result
in only adequate compensation after considering the costs to service the loans
and the resulting asset would be immaterial.

The fair value of servicing rights for mortgage loans originated and
retained by the Company are estimated based on the servicing fees for the
mortgage loans the Company services in its REMIC securitizations. Since the fair
value of such rights only sufficiently covers the cost of such servicing, no
separate servicing asset is recognized since it would be immaterial. Therefore,
the entire cost of originating the mortgage loans is allocated to the mortgages.

INTEREST RATE CONTRACTS. The Company has entered into interest rate
contracts to hedge certain firm commitments and certain mortgage loans that
the Company intends to transfer to a REMIC trust. Firm commitments subject
the Company to interest rate risk to the extent that debt or other fixed rate
financing will be used to fund such investments. The Company may elect to
hedge such financing thereby reducing its exposure to interest rate risk.
Interest rate contracts are designated as hedges of mortgage loans when the
significant characteristics and expected terms of a securitization
transaction are identified and when it is probable that the securitization
transaction will occur. These contracts are entered into in notional amounts
that generally correspond to the principal amount of the securitization
transaction. The market value of these contracts responds inversely to the
market value changes of the underlying mortgage loans; therefore, the Company
can effectively lock in its net interest margin on a

36



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

securitization transaction at the time of the hedge transaction. Any gains or
losses on the qualifying hedges deferred and are recognized upon the
completion of the hedged transaction.

REVENUE RECOGNITION. Interest income on mortgage loans and REMIC
Certificates is recognized on the accrual basis using the effective interest
method. The total amount of the base rent payments from operating leases is
accrued as earned over the term of the lease. Contingent rental income, which is
generated by a percentage of increased revenue over a specified base period
revenue of the long-term care facilities, is recognized as earned.

FEDERAL INCOME TAXES. No provision has been made for federal income
taxes. The Company qualifies as a real estate investment trust under Sections
856 through 869 of the Internal Revenue Code of 1986, as amended. As such, the
Company may deduct distributions to its stockholders from its taxable income. At
December 31, 1997, the reported amount of the Company's net assets and
liabilities exceeds the tax bases by approximately $29,000,000.

For Federal Tax purposes, depreciation is taken on the Company's owned
properties based on the assets' tax basis (which is materially the same as GAAP
book value) calculated, in general, at rate of 3.6%, using the straight-line
method over a period of 27.5 years.

Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statement purposes due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives and basis of assets.

CONCENTRATION OF CREDIT RISKS. The Company's credit risks primarily
relate to cash and cash equivalents, the investment in REMIC Certificates,
mortgage loans receivable, facility leases and interest rate swaps. The
Company's financial instruments, principally investments in REMIC
Certificates and mortgage loans receivable, are subject to the possibility of
loss of carrying value as a result of the failure of other parties to perform
according to their contractual obligations or changes in market prices which
may make the instrument less valuable. The Company obtains various collateral
and other protective rights, and continually monitors these rights, in order
to reduce such possibilities of loss. In addition, the Company provides
reserves for potential losses based upon management's periodic review of its
portfolio.

The REMIC Certificates retained by the Company are subordinate in
rank and right of payment to the certificates sold to third-party investors
and as such would bear the first risk of loss in the event of an impairment
to any of the underlying mortgages. The returns on the Company's investment
in REMIC Certificates are subject to certain uncertainties and contingencies
including, without limitation, the level of prepayments, estimated future
credit losses, prevailing interest rates, and the timing and magnitude of
credit losses on the underlying mortgages collateralizing the securities that
are a result of the general condition of the real estate market or long-term
care industry. As these uncertainties and contingencies are difficult to
predict and are subject to future events that may alter management's
estimations and assumptions, no assurance can be given that current yields
will not vary significantly in future periods. To minimize the impact of
prepayments, the mortgage loans underlying the REMIC Certificates generally
prohibit prepayment unless the property is sold to an unaffiliated third
party (with respect to the borrower). Additionally, management believes it
employs conservative underwriting policies and to date there have been no
credit losses on any of the mortgages underlying the certificates nor are any
credit losses currently anticipated.


37



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Certain of the REMIC Certificates retained by the Company have
designated certificate principal balances and a stated certificate interest
"pass-through" rate. These REMIC Certificates are subject to credit risk to the
extent that there are estimated or realized credit losses on the underlying
mortgages, and as such their effective yield would be negatively impacted by
such losses. The Company also retains the interest-only certificates ("I/O
Certificates"), which provide cash flow payments that result from the difference
between the interest collected from the underlying mortgages and interest paid
on the outstanding pass-through rate certificates. In addition to the risk from
credit losses, the I/O Certificates are also subject to prepayment risk, in that
prepayments of the underlying mortgages reduce future interest payments of which
a portion flows to the I/O Certificates, thus, reducing their effective yield.
The I/O Certificates' fair values are estimated, in part, based on a spread over
the applicable U.S Treasury rate, and consequently, are inversely affected by
increases or decreases in such interest rates. There is no active market in
these securities from which to readily determine their value. The estimated fair
values of both classes of Certificates are subject to change based on the
estimate of future prepayments and credit losses, as well as fluctuations in
interest rates and market risk.

As of December 31, 1997, Retirement Care Associates, Inc. ("RCA"),
Integrated Health Services, Inc. ("IHS"), Sun Healthcare Group, Inc. ("Sun")
and Assisted Living Concepts, Inc. ("ALC") operated, on a combined basis, 118
facilities representing 39.5% ($309.5 million) of the Company's adjusted
gross real estate investment portfolio (adjusted to include the mortgage
loans to third parties underlying the investment in REMIC Certificates). At
December 31, 1997, RCA, IHS, Sun and ALC operated 40, 16, 26 and 36,
facilities, respectively, representing approximately 14.1% ($110.2 million),
7.3% ($57.5 million), 7.2% ($56.5 million) and 10.9% ($85.3 million),
respectively, of the Company's adjusted gross portfolio. If the proposed
merger between Sun and RCA is completed, the combined entity will own 66
facilities representing 21.3% ($166.7 million) of the Company's adjusted
gross portfolio. The financial position of the Company and its ability to
make distributions may be adversely affected by financial difficulties
experienced by any of such operators, or any other major operator of the
Company, including bankruptcy, insolvency or general downturn in business of
any such operator, or in the event any such operator does not renew and/or
extend its relationship with the Company or its borrowers as it expires.

NET INCOME PER SHARE. Effective December 31, 1997, the Company adopted
SFAS No. 128, "EARNINGS PER SHARE" which replaced primary and fully diluted
earnings per share with basic and diluted earnings per share. Basic earnings per
share is calculated on the weighted average shares of common stock outstanding
during the period excluding common stock equivalents. Diluted earnings per share
includes the effect of all dilutive common stock equivalents. Earnings per share
amounts for all periods presented have been restated in conformity with the
requirements of SFAS No. 128.

SECURITIZATION TRANSACTIONS. SFAS No. 125 provides specific criteria
for determining whether a transfer of assets is a sale or a secured
borrowing. To qualify as a sale, the following conditions must be met: 1) the
transferred assets must be isolated from the transferor, 2) the transferee
obtains the right free of any conditional constraints to pledge or exchange
the assets, or the transferee is a qualifying special purpose entity of which
the holders of the beneficial interests have the right free of any
conditional constraints to pledge or exchange those interests, and 3) the
transferor does not maintain effective control over the transferred assets.
Management believes the structure of its securitization transactions meets
the sales accounting standards established by SFAS No. 125. To the extent
that recent or future interpretations of SFAS No. 125 would require
modification to the structure of the


38

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


securitization transactions, the Company would make the necessary
modifications to allow future securitizations to be accounted for as sales.

Transfers of mortgage loans to a Real Estate Mortgage Investment
Conduit ("REMIC"), a qualifying special-purpose entity, are accounted for in
accordance with SFAS No. 125. Accordingly, the transfer of loans to the REMIC
is accounted for as a sale and any gain or loss is recorded in earnings. The
gain or loss is equal to the excess or deficiency of the cash proceeds and
fair market value of any subordinated certificates received when compared
with the carrying value of the mortgages sold, net of any transaction costs
incurred and any gains or losses associated with the underlying hedge.
Subordinated certificates received by the Company are recorded at their fair
value at the date of the transaction. The Company has no controlling interest
in the REMIC since the majority of the beneficial ownership interests (in the
form of REMIC Certificates) are sold to third-party investors. Consequently,
the financial statements of the REMIC Trust are not consolidated with those
of the Company for financial reporting purposes.

STOCK-BASED COMPENSATION. The Company has elected to adopt the
disclosure requirements of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" but will continue to account for stock-based compensation using
the intrinsic value method prescribed by APB Opinion No. 25.

NEW ACCOUNTING PRONOUNCEMENTS. During 1997, the Financial
Accounting Standards Board issued SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME" and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION" which are effective for fiscal years beginning after
December 15, 1997. Adoption of SFAS No. 130 and SFAS No. 131 would not have
a material impact on the Company's financial statements or related
disclosures.

3. SUPPLEMENTAL CASH FLOW INFORMATION




1997 1996 1995
---------- ---------- ----------

Non-cash investing and financing transactions:
Securitization of mortgage loans for REMIC Certificates $ - $80,962 $ -
Issuance of mortgage loans payable for REMIC Certificates - 31,525 -
Conversion of debentures into common stock 44,005 18,813 19,357
Assumption of mortgage loans payable relating to
acquisitions of real estate properties 3,026 9,641 13,407
Assumption of capital lease obligations - - 5,965
Note payable for investment in unconsolidated affiliate 5,000 - -
Notes receivable related to exercise of stock options 9,862 - -
Conversion of mortgage loans into owned properties 9,348 - -
Minority interest 647 8,932 1,041



4. REAL ESTATE INVESTMENTS

As of December 31, 1997, the Company had investments in 351 properties
located in 34 states. The properties include 274 skilled nursing facilities with
a total of 31,462 beds and 77 assisted living residences with a total of 3,281
units.

In 1997, the Company's Board of Directors authorized an increase in the
Company's investment in assisted living residences from 20% to 30% of its
adjusted gross real estate investment portfolio (adjusted to include the
mortgage loans to third parties underlying the $87,811,000 investment in


39

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


REMIC Certificates). In addition, the Board of Directors also authorized an
increase in the Company's investment in properties operated by ALC to 20% of
its adjusted gross real estate investment portfolio. At December 31, 1997,
the Company had investments in assisted living residences and in properties
operated by ALC of approximately $154,393,000 and $85,292,000, respectively
or 19.7% and 10.9%, respectively, of the Company's adjusted gross real estate
investment portfolio.

OWNED PROPERTIES AND LEASE COMMITMENTS. During 1997, the Company
acquired nine skilled nursing facilities with a total of 823 beds and 42
assisted living residences with a total of 1,619 units for $112,748,000. The
Company also invested approximately $2,143,000 in the expansion of existing
facilities.

In November 1997, the Company agreed to enter into saleleaseback
transactions with Assisted Living Concepts, inc. ("ALC") on 11 assisted
living residences totaling $29,864,000. These transactions will be completed
by the third quarter of 1998. In connection with the above agreement, the
company sold 12 properties back to ALC for $27,690,000 and terminated a
commitment of $13,070,000 that was scheduled to expire on December 31, 1997.

During 1997, the Company evaluated three skilled nursing facilities
located in Kansas for impairment and as a result recorded a non-cash
impairment charge of $1,866,000. Impairment of these facilities is due to
adverse changes in local market conditions resulting in current operating
losses, anticipated future losses and inadequate cash flows. The impairment
charge was determined based on undiscounted future cash flows of each
facility and is included as a component of other income, net in the
accompanying income statement. The Company leases its owned long-term
facilities under operating leases generally with an initial term of ten to
twelve years. Many of the leases contain renewal options and some contain
options that permit the operators to purchase the facilities. The leases
provide for a fixed minimum base rent during the initial and renewal periods.
Most of the leases provide for annual fixed rent increases or increases based
on increases in consumer price indices over the term of the lease. Certain of
the Company's leases provide for additional rent through participation in
incremental revenues generated by the facilities, over a defined base period,
effective at various times during the term of the lease. Each lease is a
triple net lease which requires the lessee to provide for the payment of all
taxes, insurance, maintenance and other costs of the facilities by the
lessee. Contingent rent income for the years ended December 31, 1997, 1996
and 1995 was immaterial.

Depreciation expense on buildings and improvements, including
facilities owned under capital leases, was $9,041,000, $6,214,000 and
$2,996,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

Future minimum base rents receivable under the remaining
non-cancelable terms of operating leases are: $34,305,000, $34,759,000,
$33,762,000, $32,905,000, $33,274,000 and $142,256,000 for the years ending
December 31, 1998, 1999, 2000, 2001 and 2002 and thereafter.

MORTGAGE LOANS. During 1997, the Company invested $107,487,000 in
mortgage loans. Approximately $98,135,000 of these loans is permanent
mortgage financing and is secured by, among other things, first mortgages on
33 skilled nursing facilities located in 11 states with a total of 3,642 beds
and nine assisted living residences located in three states with a total of
396 units. The loans contain


40

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

certain guarantees and individually range from $1,000,000 to $10,000,000 in
principal amount, have initial interest rates ranging from 9.0% to 11.57%,
have stated maturities of 10 to 20 years, generally have 25-year amortization
schedules, and provide for certain facility fees. Most of the loans provide
for an annual increase in the interest rate of 10 to 12.5 basis points. Of
the total loans originated during 1997, loans totaling $14,510,000 and
bearing interest at 10.14% were repaid during 1997. In addition, prepayments
of approximately $8,888,000 on four loans originated prior to 1997 with
original scheduled maturities ranging from 2000 to 2007 and scheduled
principal payments totaling $1,579,000 were received. During 1997, the
Company provided net funding of approximately $9,352,000 for construction of
assisted living residences.

At December 31, 1997, the Company had 89 permanent financing and 14
construction funding mortgage loans receivable secured by first mortgages on
101 skilled nursing facilities with 11,766 beds and 20 assisted living
residences with 1,076 units. The mortgage loans, which have a carrying amount
of approximately $254,094,000 at December 31, 1997, are reflected in the
Company's financial statements net of $1,000,000 of loan loss reserves. The
mortgage loans individually range from $286,000 to $11,203,000 in principal
amount and have a current weighted average interest rate of 10.8%. The
scheduled principal payments on mortgage loans are $4,000,000, $6,222,000,
$5,303,000, $8,714,000, $3,789,000 and $227,066,000 in 1998, 1999, 2000,
2001, 2002 and thereafter.

At December 31, 1997 and 1996, the fair value of mortgage loans
approximated $268,000,000 and $189,483,000, respectively.

REMIC CERTIFICATES. REMIC STRUCTURE. The Company has organized
itself as a REIT and, as such, makes its investments with the intent to hold
them for long-term purposes. However, mortgage loans may be transferred to a
REMIC (securitization) when a securitization provides the Company with the
best available form of raising capital for additional long-term investments.
When contemplating a securitization, consideration is given to the Company's
current and expected future interest rate posture and liquidity and leverage
position, as well as overall economic and financial market trends. As of
December 31, 1997 the Company had completed three securitization transactions.

A securitization is completed in a two-step process. First, a wholly
owned special-purpose bankruptcy remote corporation (the "REMIC Corp.") is
formed. Mortgage loans selected for securitization are transferred by the
Company to the REMIC Corp. without recourse. Second, the REMIC Corp. then
transfers the loans to a trust (the "REMIC Trust") in exchange for commercial
mortgage pass-through certificates (the "REMIC Certificates") which represent
beneficial ownership interests in the REMIC Trust assets (the underlying
mortgage loans). The REMIC Certificates include various levels of senior,
subordinated, interest only and residual classes. The subordinated REMIC
Certificates generally provide a level of credit enhancement to the senior
REMIC Certificates. The senior and residual REMIC Certificates (which
historically have represented between 66% and 81% of the total REMIC
Certificates for the three securitization transactions) are then sold to
outside third-party investors through a private placement under Rule 144A of
the Securities Act of 1933, as amended. The subordinated REMIC Certificates
along with the cash proceeds from the sale of the senior REMIC Certificates
are retained by the REMIC Corp. as consideration for the initial transfer of
the mortgage loans to the REMIC Trust. Neither the Company nor the REMIC
Corp. is obligated to purchase any of the REMIC Trust assets or assume any
liabilities.

41



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


DESCRIPTION OF THE REMIC CERTIFICATES. The REMIC Certificates issued
represent beneficial ownership interests in the REMIC Trust and can be
grouped into four categories; senior, subordinated, subordinated
interest-only ("I/O"), and residuals. The REMIC Certificates sold to
third-party investors are referred to herein as the "Senior Certificates"
while the REMIC Certificates retained by the Company as part of the sale
proceeds are referred to as the "Subordinated Certificates." Both classes of
these Certificates have stated principal balances and stated interest rates
("pass-through rates"). In addition, the I/O REMIC Certificates have no
stated principal but are entitled to interest distributions. Interest
distributions on the I/O REMIC Certificates are typically based on the spread
between the monthly interest received by the REMIC Trust on the underlying
mortgage collateral and the monthly pass-through interest paid by the REMIC
Trust the outstanding REMIC Certificates. After payment of the pass-through
interest on the outstanding REMIC Certificates and interest distributions on
the I/O Certificates, the REMIC Trust distributes the balance of the payments
received on the underlying mortgages as a distribution of principal. Interest
and principal distributions are made in order of REMIC Certificate seniority.
As such, to the extent there are defaults or unrecoverable losses on the
underlying mortgages resulting in reduced cash flows, the Subordinated
Certificates held by the Company would bear the first risk of loss. As of
December 31, 1997 none of the three REMIC pools had experienced any realized
losses nor had any of the Company's REMIC Certificate investments been
determined to be permanently impaired.

REMIC TRANSACTIONS. During 1996, the Company securitized
approximately $112,487,000 of mortgage loans (the "1996-1 Pool"). As part of
the securitization, the Company sold approximately $90,552,000 of Senior
Certificates at an effective interest rate of 7.19% and retained $21,935,000
face amount of Subordinated Certificates (including I/O Certificates). The
net proceeds from the securitization were used to repay borrowings
outstanding under the Company's lines of credit. The 1996-1 Pool consisted of
34 mortgage loans with an initial weighted average interest rate of 10.69%,
including loans totaling $31,525,000 provided to wholly owned subsidiaries
and limited partnerships of the Company. Concurrently with the closing of the
securitization, an interest rate swap agreement entered into in May 1995 was
terminated at a cost of approximately $1,500,000 and was included as a
component of the transaction cost in the determination of the fair value of
the assets received.

During 1993 and 1994, the Company completed securitizations of
approximately $242,340,000 of mortgage loans (the "1993-1 Pool" and the "1994-1
Pool", respectively). As part of these securitizations, the Company sold
approximately $158,664,000 of Senior Certificates and retained approximately
$83,676,000 face amount of Subordinated Certificates.

REMIC CERTIFICATES. In June 1997, the Company sold $11,811,000 face
amount of Subordinated Certificates from the 1996-1 Pool and recognized a
gain of $1,231,000. The gain is recorded in other income, net in the
accompanying income statement. As of December 31, 1997 the outstanding
principal balance and the weighted average pass-through rate for the Senior
Certificates (held by third parties) in the 1993-1 Pool, the 1994-1 Pool and
the 1996-1 Pool was $52,829,000 and 7.6%, $42,864,000 and 9.2%, and
$96,048,000 and 7.4%, respectively and the estimated fair value of the
Subordinated Certificates held by the Company was $25,994,000, $38,242,000
and $23,575,000, respectively. As of December 31, 1996 the outstanding
principal balance and the weighted average pass-through rate for the Senior
Certificates (held by third parties) in the 1993-1 Pool, the 1994-1 Pool and
the 1996-1 Pool was $59,223,000 and 7.5%, $47,649,000 and 9.2%, and
$85,338,000 and 7.2%, respectively and the estimated fair value of the
Subordinated Certificates held by the Company was $29,461,000, $37,236,000
and $32,237,000, respectively.

42



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


At December 31, 1997 and 1996, the aggregate unamortized cost basis
of the Subordinated Certificates was $81,365,000 and $92,545,000,
respectively. The effective yield on the Subordinated Certificates, based on
expected future cash flows with no unscheduled prepayments, was 16.7% and
15.8% at December 31, 1997 and 1996, respectively.

Income on the Subordinated Certificates for the 1993-1 Pool, the 1994-1
Pool and the 1996-1 Pool was $4,992,000, $4,650,000 and 4,547,000 in 1997,
$5,603,000, $5,118,000 and $3,662,000 in 1996 and $5,628,000, $5,275,000 and $0
in 1995.

As part of the REMIC transactions, the Company serves as the
sub-servicer and, in such capacity, is responsible for performing substantially
all of the servicing duties relating to the mortgage loans underlying the REMIC
Certificates. The Company receives monthly fees equal to a fixed percentage of
the then outstanding mortgage loans that, in management's opinion, represent
currently prevailing terms for similar transactions. In addition, the Company
will act as the special servicer to restructure any mortgage loans underlying
the REMIC Certificates that are in default. At December 31, 1997, all of the
payments currently due on the REMIC Certificates were received.

5. DISPOSITIONS OF OTHER ASSETS

During 1997, the Company acquired non-voting common stock of Home
and Community Care, Inc. ("HCI"), an owner, operator and developer of
assisted living residences, for $5,000,000. Subsequently, the Company
received a distribution of $5,000,000 representing a return of investment.
Following payment of the distribution, ALC acquired all of the outstanding
common stock of HCI for which the Company received gross proceeds of
$2,000,000. As a result of the acquisition, certain benefits were accelerated
for certain officers who ended their employment with the Company to become
employees of ALC. A net gain of $1,015,000 was recorded on the sale of the
investment in HCI and is included in other income, net in the accompanying
income statement. The Company may receive additional future payments of
approximately $3,000 per unit for up to 543 units under development by HCI at
the date of the acquisition.

6. DEBT OBLIGATIONS

BANK BORROWINGS. At December 31, 1996, the Company had $38,000,000
outstanding under a repurchase agreement (the "Repurchase Agreement") secured
by mortgage loans whereby it could borrow up to $84,000,000 at LIBOR plus 2%
and $41,400,000 outstanding under a $45,000,000 unsecured revolving credit
agreement (the "Credit Agreement") bearing interest at 7.2%.

In August 1997, the Company obtained a 90-day $10,000,000 bank loan
at LIBOR plus 3%. In September 1997, the Company obtained an additional
45-day $10,000,000 bank loan at LIBOR plus 3%. In October, 1997, all amounts
outstanding under the 90-day bank loan, the 45-day bank loan, the Repurchase
Agreement and the Credit Agreement were refinanced with a $170,000,000 Senior
Unsecured Revolving Line of Credit (the "Revolving Credit Facility") which
expires on October 3, 2000. The Revolving Credit Facility pricing varies
between LIBOR plus 1.25% and LIBOR plus 1.5% depending on the Company's
leverage ratio. As of December 31, 1997, borrowings of $87,500,000 bearing
interest at LIBOR plus 1.375% were outstanding under the Revolving Credit
Facility. The Revolving Credit Facility contains financial covenants
including, but not limited to, maximum leverage ratios, minimum debt service
coverage ratios, cash flow coverage ratios and minimum consolidated tangible
net worth.

43

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


CONVERTIBLE SUBORDINATED DEBENTURES.



December 31,
Conversion ------------------------------------
Interest Rate Maturity Price per share 1997 1996
- ----------------- ------------------ -------------------- ---------------- -----------------

9.75% June 2004 $10.00 $ 549,000 $ 843,000
8.50% January 2000 $15.00 19,476,000 22,023,000
8.50% January 2001 $15.50 30,048,000 45,157,000
8.25% January 1999 $15.50 10,000,000 10,000,000
7.75% January 2002 $16.50 9,765,000 27,840,000
8.25% July 2001 $17.25 21,985,000 29,965,000
---------------- ----------------
$ 91,823,000 $135,828,000
---------------- ----------------
---------------- ----------------


During 1996, the Company issued $30,000,000 principal amount of 7.75%
convertible debentures due January 2002 and $30,000,000 principal amount of
8.25% convertible debentures due 2001. During 1997, $294,000, $2,547,000,
$15,109,000, $18,075,000 and $7,980,000 of 9.75% debentures due 2004, 8.5%
debentures due 2000, 8.5% debentures due 2001, 7.75% debentures due 2002 and
8.25% debentures due 2001 converted into 29,400, 169,786, 974,765, 1,095,447 and
462,598 shares of common stock, respectively. During 1996, $2,298,000,
$7,977,000, $6,343,000, $2,160,000 and $35,000 of 9.75% debentures due 2004,
8.5% debentures due 2000, 8.5% debentures due 2001, 7.75% debentures due 2002
and 8.25% debentures due 2001 converted into 229,800, 531,794, 409,224, 130,908
and 2,028 shares of common stock, respectively.

The 9.75% debentures due 2004 are redeemable by the Company at any time
at 100% of the principal plus accrued interest. The 8.5% debentures due 2000 are
redeemable by the Company as of January 1, 1998. The 8.5% debentures due 2001,
the 8.25% debentures due 1999 and the 8.25% debentures due 2001 are not
redeemable by the Company. The 7.75% debentures are not redeemable by the
Company prior to January 1, 2001.

Based on the quoted market price of the Company's common stock and
the conversion price of the convertible debentures, the fair value of the
debentures approximated $120,419,000 and $159,365,000 at December 31, 1997
and 1996, respectively.

MORTGAGE LOANS PAYABLE. In 1996, the Company provided non-recourse
mortgage loans to three of its wholly owned subsidiaries and to certain newly
formed limited partnerships in which the Company is a general partner totaling
$31,525,000. During 1996, in connection with the acquisition of 16 skilled
nursing facilities, the Company assumed mortgage loans of approximately
$9,641,000. Also during 1996, the Company paid off one of its outstanding
mortgage loans totaling $3,331,000. In 1997, the Company acquired a skilled
nursing facility and in connection therewith, assumed a mortgage loan of
$3,026,000.

As of December 31, 1997 and 1996, the Company had mortgage loans of
$18,826,000 and $35,261,000 payable to the 1993-1 Pool, $3,021,000 and $0
payable to the 1994-1 Pool and $34,938,000 and $18,944,000 payable to the 1996-1
Pool, respectively. Weighted average interest rates for mortgages payable to the
1993-1 Pool, the 1994-1 Pool and the 1996-1 Pool were 12.0%, 11.3% and 9.5%,
respectively. Scheduled maturities range from 2002 to 2006.


44

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

BONDS PAYABLE AND CAPITAL LEASES. At December 31, 1997 and 1996, the
Company had outstanding principal of $8,065,000 and $8,300,000, respectively,
on multifamily tax-exempt revenue bonds. These bonds bear interest at a
variable rate that is reset weekly and mature during 2015. For the year ended
December 31, 1997, the weighted average interest rate, including letter of
credit fees, on the outstanding bonds was 5.51%.

As of December 31, 1997 and 1996, the Company had outstanding
principal of $5,551,000 and $5,739,000, respectively, under capital lease
obligations. The capital leases are secured by four assisted living
residences, have a weighted average interest rate of 7.64% and mature at
various dates through 2013.

SCHEDULED PRINCIPAL PAYMENTS. Aggregate scheduled principal payments
for the mortgage loans payable, bonds payable and capital lease obligations as
of December 31, 1997 were $976,000, $1,057,000, $1,155,000, $1,259,000,
$5,659,000 and $60,295,000 in 1998, 1999, 2000, 2001, 2002 and thereafter.

7. COMMITMENTS

INTEREST RATE CONTRACTS. In 1996, the Company provided a $50,180,000
commitment to purchase assisted living residences. In connection therewith,
the Company entered into a one-year forward ten-year interest rate swap
agreement. Under this agreement, the Company was credited interest at three
month LIBOR and incurred interest at a fixed rate of 6.835% on a $40,000,000
notional amount. In 1997, the Agreement was terminated concurrently with the
completion of an equity offering and the Company recognized interest income
of approximately $440,000.

In September 1995, the Company entered into a seven year forward
interest rate swap agreement that has been extended and is scheduled to be
settled on June 30, 1998. Under this agreement, the Company is credited
interest semi-annually at the six month LIBOR and incurs interest at a fixed
rate of 6.655% on a notional amount of $60,000,000. In August 1997, the
Company entered into a Treasury lock agreement that has been extended and is
scheduled to be settled by April 30, 1998. Under this agreement, the Company
locked into a rate of 6.484% on the seven year Treasury Note Rate on a
notional amount of $65,000,000. Upon settlement of the Treasury lock
agreement the Company will either receive or make a payment based on the
change in the seven year Treasury Note Rate. The interest rate swap and the
Treasury lock agreements are accounted for as hedges and were entered into to
minimize the Company's exposure to interest rate risk on mortgage loans that
the Company intends to transfer to a REMIC trust. The fair value of mortgage
loans may vary with changes in interest rates.

Notional amounts do not represent amounts exchanged with other
parties and, thus are not a measure of the Company's exposure to loss through
its use of these agreements. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the agreements.

8. STOCKHOLDERS' EQUITY

ISSUANCE OF STOCK. During 1997, the Company completed public
offerings for 2,000,000 shares of common stock resulting in aggregate net
proceeds of $35,065,000. In addition, the Company issued 3,080,000 shares of
9.5% Series A Cumulative Preferred Stock ("Series A Preferred Stock") and
2,000,000 shares of 9.0% Series B Cumulative Preferred Stock ("Series B
Preferred Stock") for net proceeds of $121,600,000. Dividends on the Series A
Preferred Stock and Series B Preferred Stock

45



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


are cumulative from the date of original issue and are payable monthly to
stockholders of record on the first day of each month. Dividends on the
Series A Preferred Stock and the Series B Preferred Stock accrue at 9.5% and
9.0% per annum, respectively, on the $25 liquidation preference per share
(equivalent to a fixed annual amount of $2.375 and $2.25 per share,
respectively). The Series A Preferred Stock is not redeemable prior to April
1, 2001 and the Series B Preferred Stock is not redeemable prior to January
1, 2002, except in certain circumstances relating to preservation of the
Company's qualification as a REIT. The net proceeds from these offerings were
used to repay short-term borrowings outstanding under the Company's lines of
credit.

On April 24, 1997, the Company filed a shelf registration statement
with the Securities and Exchange Commission covering up to $150,000,000 of debt
and equity securities. The registration statement was declared effective May 6,
1997. As of December 31, 1997, the Company has $81,675,000 available under its
shelf registration statement.

REPURCHASE OF COMMON STOCK. During 1996, the Company repurchased
and retired 120,000 shares of common stock for an aggregate price of
approximately $1,831,000.

OPTION PLAN. The Company has a stock option plan ("the Plan") that
provides for issuance of incentive and nonqualified options and restricted
shares of common stock. Incentive options may be granted only to officers and
employees of the Company, while nonqualified options and restricted stock may be
granted to directors, officers and other key persons who provide services to the
Company. Options vest over two to five years and are exercisable within seven
years from the date of vesting. In general, each option shall expire on the date
specified in the option agreement, but not later than the tenth anniversary of
the date on which the option was granted.

The following summarizes transactions regarding the nonqualified
options for the years ended December 31, 1997, 1996 and 1995:



SHARES WEIGHTED AVERAGE PRICE
------------------------------------------- ---------------------------------
1997 1996 1995 1997 1996 1995
------------- -------------- ------------- ----------- ---------- ----------

Outstanding, January 1 873,300 861,500 839,500 $11.30 $11.23 $11.20
Granted 15,000 18,000 27,000 $17.00 $15.13 $12.22
Exercised (717,800) (3,200) (2,000) $11.44 $12.17 $12.25
Canceled (1,000) (3,000) (3,000) $12.00 $12.25 $12.00
------------- -------------- -------------
Outstanding, December 31 169,500 873,300 861,500 $11.21 $11.30 $11.23
------------- -------------- -------------
------------- -------------- -------------
Exercisable, December 31 31,500 436,466 272,333 $11.21 $11.88 $11.79
------------- -------------- -------------
------------- -------------- -------------
Available for grant, December 31 31,000 358,000 533,000
------------- -------------- -------------
------------- -------------- -------------



In 1996, the Board of Directors approved the issuance of 160,000
shares of restricted stock to certain employees and non-employee directors
(the "1996 Grant"). During 1997, the Board of Directors authorized the
accelerated vesting of 64,000 shares of the 1996 Grant and the Company
recognized compensation expense of $1,120,000. An additional 27,000 shares of
the 1996 Grant vested upon certain employees ending their employment with the
Company in connection with the sale of HCI resulting in a charge of $515,000.
During 1997, the Board of Directors approved the issuance of 313,000 shares
of restricted stock to certain employees and non-employee directors (the
"1997 Grant"). As of December 31, 1997, 69,000 and 313,000 shares were
restricted under the 1996 Grant and the 1997 Grant, respectively. The shares
outstanding under the 1996 Grant and the 1997 Grant vest over three and four


46



LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

years, respectively, beginning January 2000. Dividends are payable on the
restricted shares to the extent and on the same date as dividends are paid on
all of the Company's common stock.

As of December 31, 1997, 1996 and 1995, there were 31,000, 44,000
and 27,000 options outstanding, respectively, subject to the disclosure
requirements of SFAS No. 123. The fair value of these options was estimated
utilizing the Black-Scholes valuation model and assumptions as of each
respective grant date. In determining the estimated fair values for the
options granted in 1997, 1996 and 1995, the weighted average expected life
assumption was three years for 1997 and seven years for 1996 and 1995, the
weighted average volatility was .16, .15 and .16, respectively and the
weighted average risk free interest rate was 6.6%. The weighted average fair
value of the options granted was estimated to be $.67, $0.63 and $0.62 in
1997, 1996 and 1995, respectively. There was no material effect on net income
or earnings per share for the years ended December 31, 1997, 1996 and 1995.
The weighted average exercise price of the options were $14.99, $13.55 and
$12.45 and the weighted average remaining contractual life was 7.6, 7.7 and
8.3 years as of December 31, 1997, 1996 and 1995, respectively.

NOTES RECEIVABLE FROM STOCKHOLDERS. In 1997, the Board of Directors adopted a
loan program designed to encourage executives, key employees, consultants and
directors to acquire common stock through the exercise of options. Under the
program, the Company will make full recourse, secured loans to participants
equal to the exercise price of vested options plus up to 50% of the taxable
income resulting from the exercise of options. Such loans will bear interest
at the then current Applicable Federal Rate and are payable in quarterly
installments over nine years. For the first five years the principal due each
quarter will be equal to 50% of the difference between the cash dividends
received on the shares purchased and the quarterly interest due. In addition,
25% of cash bonuses and 50% of the dividends on restricted stock granted
under the 1997 Grant received by the borrower must be used to reduce the
principal balance. The loans will convert to fully amortizing loans with 16
quarterly payments beginning in year six. Unless the Board of Directors
approves otherwise, loans must be repaid within 90 days after termination of
employment for any reason, other than in connection with a change in control
of the Company. In 1997, the Company's management, consultants and directors
purchased 686,500 of the Company's common stock under the loan program. At
December 31, 1997, loans totaling $9,429,000 bearing interest at rates
ranging from 5.97% to 6.63% per annum were outstanding. These loans are
secured by a pledge of the shares of common stock acquired through the
exercise of options and are full recourse to the borrower. The market value
of the common stock securing these loans was $14,245,000 at December 31, 1997.

FOUNDERS' STOCK. The Company issued 300,000 shares of restricted common
stock to the founders of the Company. The market value at the time of grant was
estimated at $5.00 per share and was recorded as a reduction of capital in
excess of par value as unearned stock grant compensation. The unearned
compensation was charged to expense over the vesting period. For the years ended
December 31, 1997, 1996 and 1995 amortization of founders' stock was $31,000,
$114,000 and $221,000, respectively.

9. DISTRIBUTIONS

The Company must distribute at least 95% of its taxable income in order
to continue to qualify as a REIT. Distributions in a given year may exceed the
Company's earnings and profits due to non-cash expenses such as depreciation and
amortization. Under special tax rules for REITs, dividends declared in the last
quarter of the calendar year and paid by January 31 of the following year are
treated as paid on December 31 of the year declared. Distributions on the common
stock per share are broken down according to the following categories for income
tax purposes:

47

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



1997 1996 1995
-------------- -------------- --------------

Ordinary income $1.293 $1.228 $1.05
Non-taxable distribution 0.037 0.107 .16
Section 1250 capital gain 0.030 - -
Long term capital gain 0.075 - -
-------------- -------------- --------------
Total $1.435 $1.335 $1.21
-------------- -------------- --------------
-------------- -------------- --------------

10. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net
income per share (in thousands, except per share amounts):



1997 1996 1995
-------------- -------------- --------------

Net income $35,763 $28,710 $18,384
Preferred dividends (6,075) - -
-------------- -------------- --------------
Net income for basic net income per share 29,688 28,710 18,384
7.75% debentures due 2002 - 2,187 -
8.5% debentures due 2001 - 4,509 -
8.5% debentures due 2000 - 2,350 -
Other dilutive securities 32 977 1,296
-------------- -------------- --------------
Net income for diluted net income per share $29,720 $38,733 $19,680
-------------- -------------- --------------
-------------- -------------- --------------

Shares for basic net income per share 23,511 18,983 18,030
Stock options 277 374 -
7.75% debentures due 2002 - 1,757 -
8.5% debentures due 2001 - 3,174 -
8.5% debentures due 2000 - 1,751 -
Other dilutive securities 75 824 1,475
-------------- -------------- --------------
Shares for diluted net income per share 23,863 26,863 19,505
-------------- -------------- --------------
-------------- -------------- --------------

Basic net income per share $1.26 $1.51 $1.02
-------------- -------------- --------------
-------------- -------------- --------------

Diluted net income per share $1.25 $1.44 $1.01
-------------- -------------- --------------
-------------- -------------- --------------


11. SUBSEQUENT EVENTS

For the period January 1, 1998 through March 20, 1998, the Company
acquired six skilled nursing facilities and three assisted living residences for
approximately $31,000,000. Five of the skilled nursing facilities were purchased
subject to mortgage loans of approximately $7,000,000. For the period January 1,
1998 through March 20, 1998, $15,506,000 principal amount of convertible
subordinated debentures converted into 986,156 shares of common stock. In
addition, certain executives and non-employee directors exercised stock options,
under the stock option loan program, for 146,500 shares of common stock at an
average exercise price of $10.64.

48

LTC PROPERTIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of March 13, 1998, the Company had outstanding commitments to
provide financing through mortgage loans or sale/lease-back transactions
totaling approximately $242,250,000. Of the outstanding commitments,
$50,000,000 expire in 1999 and $50,000,000 expire in 2000.

12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following quarterly financial data summarizes the unaudited
quarterly results for the years ended December 31, 1997 and 1996 (in thousands,
except per share amounts):



QUARTER ENDED
----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ------------ -------------------- ------------------

1997
Revenues $16,487 $18,115 $18,809 $20,023
Net income available
to common stockholders 6,107 8,098 7,545 7,938
Basic net income available to
common stockholders per share 0.28 0.35 0.32 0.31
Diluted net income available to
common stockholders per share 0.27 0.35 0.31 0.31
Dividends per share 0.34 0.365 0.365 0.365



1996
Revenues $12,363 $12,920 $14,292 $15,355
Net income 11,831 4,906 5,636 6,337
Basic net income per share 0.78 0.26 0.30 0.32
Diluted net income per share 0.55 0.26 0.29 0.32
Dividends per share 0.315 0.34 0.34 0.34



49

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ACCOUNTING AND FINANCIAL DISCLOSURE

Not Applicable.


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 19, 1998, to be
filed pursuant to Regulation 14A.


ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 19, 1998, to be
filed pursuant to Regulation 14A.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 19, 1998, to be
filed pursuant to Regulation 14A.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 19, 1998, to be
filed pursuant to Regulation 14A.

ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.

(a) Financial Statement Schedules

The financial statement schedules listed in the accompanying
index to financial statement schedules are filed as part of
this annual report.

(b) Exhibits

The exhibits listed in the accompanying index to exhibits are
filed as part of this annual report.

(c) Reports on Form 8-K

None.


50

INDEX TO FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a))



VII. Valuation and Qualifying Accounts .......................... 52
XI. Real Estate and Accumulated Depreciation ................... 53
XII. Mortgage Loans on Real Estate .............................. 56


All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule.


51

LTC PROPERTIES, INC.
SCHEDULE VII
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)




Balance at Beginning of Charge to Balance at
Period Operations End of Period
----------------------------- ----------------------- ---------------------------

Allowance for Doubtful Accounts:

1997 $1,000 - $1,000

1996 $ 997 3 $1,000


1995 $ 997 - $ 997



52


LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)


INITIAL COST GROSS AMOUNT IN WHICH
TO CARRIED AT DECEMBER 31,
COMPANY 1997
----------------- COSTS ---------------------------
BUILDING CAPITALIZED BUILDING
AND SUBSEQUENT AND ACCUM. CONSTRUCTION/
IMPROVE- TO IMPROVE- DEPREC. RENOVATION ACQUISITION
ENCUMBRANCES LAND MENTS ACQUISITION LAND MENTS TOTAL(1) (2) DATE DATE
------------ ------- -------- ---------- ------- -------- -------- ------- ------------- -----------

Skilled Nursing
Facilities:
Demopolis, AL $10,602(3) $ 71 $ 2,141 - $ 71 $ 2,141 $ 2,212 $ 187 1972 Jun. 1995
Fort Payne, AL (3) 37 3,588 - 37 3,588 3,625 338 1967/73 Jun. 1995
Jackson, AL (3) 64 2,620 - 64 2,620 2,684 223 1964 Jun. 1995
Madison, AL (3) 30 2,328 - 30 2,328 2,358 213 1964/74 Jun. 1995
Phoenix, AL (3) 59 2,123 - 59 2,123 2,182 200 1969 Jun. 1995
Phoenix, AZ 7,707 432 6,764 - 432 6,764 7,196 903 1985/92 May 1994
Tucson, AZ 6,516 145 3,932 - 145 3,932 4,077 638 1985 Mar. 1993
East Whittier, CA - 170 1,742 - 170 1,742 1,912 231 1964 Sep. 1994
West Whittier, CA - 726 1,185 - 726 1,185 1,911 178 1964 Sep. 1994
Bradenton, FL - 330 2,720 - 330 2,720 3,050 397 1989 Sep. 1993
Clearwater, FL - 454 2,903 - 454 2,903 3,357 504 1965/93 Sep. 1993
Crestview, FL - 140 2,306 - 140 2,306 2,446 279 1988 Jun. 1994
San Destin, FL - 175 3,875 - 175 3,875 4,050 399 1986 Feb. 1995
Gulf Breeze, FL - 600 6,020 - 600 6,020 6,620 725 1984 Jun. 1994
Lecanto, FL - 351 2,665 2,252 351 4,917 5,268 594 1988 Sep. 1993
Pensacola, FL - 190 4,295 - 190 4,295 4,485 526 1972 Jun. 1994
Pensacola, FL - 230 4,663 - 230 4,663 4,893 562 1991 Jun. 1994
Starke, FL - 113 4,783 - 113 4,783 4,896 574 1989 Jun. 1994
Chicago Heights, IL - 221 6,406 - 221 6,406 6,627 750 1988 Sep. 1994
Alamagordo, NM - 314 3,567 - 314 3,567 3,881 612 1985 Mar. 1993
Roswell, NM - 85 2,932 - 85 2,932 3,017 635 1979 Nov. 1992
Great Falls, MT 4,285 397 3,433 - 397 3,433 3,830 755 1960/90 Dec. 1992
Rusk, TX - 34 2,399 - 34 2,399 2,433 377 1969 Mar. 1994
Chesapeake, VA - 373 3,298 - 373 3,298 3,671 312 1977 Oct. 1995
Richmond, VA - 373 3,298 - 373 3,298 3,671 312 1970/75/80 Oct. 1995
Tappahannock, VA - 373 3,298 - 373 3,298 3,671 312 1977/78 Oct. 1995
Toppanish, WA 2,612(4) 132 2,654 - 132 2,654 2,786 244 1960/70 Jun. 1995
Vancouver, WA (4) 60 3,031 - 60 3,031 3,091 288 1952/94 Jun. 1995
Jefferson, IA 10,496(5) 36 1,933 - 36 1,933 1,969 128 1968/72 Jan. 1996
Houston, TX - 202 4,458 - 202 4,458 4,660 255 1961 Jun. 1996
Houston, TX - 362 3,772 - 362 3,772 4,134 241 1964/68 Jun. 1996
Montgomery, AL 3,904(6) 144 5,426 - 144 5,426 5,570 368 1967/74 Jan. 1996
Carroll, IA (5) 60 1,020 - 60 1,020 1,080 71 1969 Jan. 1996
Houston, TX - 202 4,458 - 202 4,458 4,660 255 1967 Jun. 1996
Woodbury, TN - 100 2,900 - 100 2,900 3,000 165 1972/75/90 May 1996
Whiteright, TX 1,120 100 2,923 - 100 2,923 3,023 214 1962/64/65 Jan. 1996
Granger,IA (5) 93 1,325 - 93 1,325 1,418 92 1979 Jan. 1996
Bedford, TX (5) 345 3,195 - 345 3,195 3,540 229 1960 Jan. 1996
Midland, TX 2,030 32 2,285 - 32 2,285 2,317 166 1973 Feb. 1996
Tiptonville, TN - 100 2,450 - 100 2,450 2,550 140 1975 May 1996
Gardendale, AL - 84 6,316 - 84 6,316 6,400 352 1976/84 May 1996
Polk City, IA (5) 88 1,351 - 88 1,351 1,439 90 1976 Jan. 1996
Atmore, AL (6) 23 2,985 - 23 2,985 3,008 197 1967/74 Jan. 1996
Mesa, AZ 4,492 305 6,909 1,696 305 8,605 8,910 366 1975/96 Jun. 1996
Houston, TX - 572 5,965 - 572 5,965 6,537 381 1967 Jun. 1996
Roberta, GA - 100 2,400 - 100 2,400 2,500 137 1964 May 1996
Norwalk, IA (5) 45 1,035 - 45 1,035 1,080 71 1975 Jan. 1996
Altoona, IA (5) 102 2,312 - 102 2,312 2,414 151 1973 Jan. 1996
Los Angeles, CA - 100 2,475 - 100 2,475 2,575 92 1963 Jan. 1997
Sacramento, CA - 220 2,929 - 220 2,929 3,149 102 1968 Feb. 1997
Coffeyville, KS - 100 335 - 100 335 435 153 1962 May 1997
Salina, KS - 100 1,066 - 100 1,066 1,166 425 1985 May 1997
South Haven, KS - 100 - - 100 - 100 13 1969 May 1997
Portland, OR - 100 1,925 43 100 1,968 2,068 39 1956/74 Jun. 1997
Nacogdoches, TX - 100 1,738 - 100 1,738 1,838 11 1973 Oct. 1997
Cushing, TX - 100 1,679 - 100 1,679 1,779 10 1973/84 Oct. 1997
Mesa, AZ 3,021 100 4,578 - 100 4,578 4,678 26 1972 Oct. 1997
------------ ------- -------- ---------- ------- -------- -------- -------
SNFs 56,785 10,794 177,112 3,991 10,794 181,103 191,897 17,208
------------ ------- -------- ---------- ------- -------- -------- -------

53


LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)



INITIAL COST GROSS AMOUNT IN WHICH
TO CARRIED AT DECEMBER 31,
COMPANY 1997
----------------- COSTS ---------------------------
BUILDING CAPITALIZED BUILDING
AND SUBSEQUENT AND ACCUM. CONSTRUCTION/
IMPROVE- TO IMPROVE- DEPREC. RENOVATION ACQUISITION
ENCUMBRANCES LAND MENTS ACQUISITION LAND MENTS TOTAL(1) (2) DATE DATE
------------ ------- -------- ---------- ------- -------- -------- ------- ------------- -----------

Assisted Living
Facilities:
Dodge City, KS 1,626 88 1,663 - 88 1,663 1,751 100 1995 Dec. 1995
Great Bend, KS 1,370 87 1,563 - 87 1,563 1,650 94 1995 Dec. 1995
McPherson, KS 1,189 75 1,575 - 75 1,575 1,650 94 1994 Dec. 1995
Salina, KS 1,366 72 1,578 - 72 1,578 1,650 94 1994 Dec. 1995
Longview, TX - 38 1,568 - 38 1,568 1,606 94 1995 Oct. 1995
Marshall, TX - 38 1,568 450 38 2,018 2,056 102 1995 Oct. 1995
Walla Walla, WA 8,065(7) 100 1,940 - 100 1,940 2,040 93 1996 Apr. 1996
Greenville, TX - 42 1,565 - 42 1,565 1,607 86 1995 Jan. 1996
Camas, WA (7) 100 2,175 - 100 2,175 2,275 94 1996 May 1996
Grandview, WA (7) 100 1,940 - 100 1,940 2,040 98 1996 Mar. 1996
Vancouver, WA (7) 100 2,785 - 100 2,785 2,885 120 1996 Jun. 1996
Athens, TX - 96 1,512 - 96 1,512 1,608 83 1995 Jan. 1996
Lufkin, TX - 100 1,950 - 100 1,950 2,050 94 1996 Apr. 1996
Kennewick. WA (7) 100 1,940 - 100 1,940 2,040 102 1996 Feb. 1996
Gardendale, AL - 16 1,234 - 16 1,234 1,250 69 1988 May 1996
Jacksonville, TX - 100 1,900 - 100 1,900 2,000 97 1996 Mar. 1996
Kelso, WA - 100 2,500 - 100 2,500 2,600 79 1996 Nov. 1996
Battleground, WA - 100 2,500 - 100 2,500 2,600 73 1996 Nov. 1996
Hayden, ID - 100 2,450 243 100 2,693 2,793 73 1996 Dec. 1996
Klamath Falls, OR - 100 2,300 - 100 2,300 2,400 68 1996 Dec. 1996
Newport, OR - 100 2,050 - 100 2,050 2,150 56 1996 Dec. 1996
Tyler, TX - 100 1,800 - 100 1,800 1,900 50 1996 Dec. 1996
Wichita Falls, TX - 100 1,850 - 100 1,850 1,950 51 1996 Dec. 1996
Ada, OK - 100 1,650 - 100 1,650 1,750 46 1996 Dec. 1996
Nampa, ID - 100 2,240 23 100 2,263 2,363 61 1997 Jan. 1997
Tulsa, OK - 200 1,650 - 200 1,650 1,850 39 1997 Feb. 1997
Durant, OK - 100 1,769 - 100 1,769 1,869 33 1997 Apr. 1997
San Antonio, TX - 100 1,900 - 100 1,900 2,000 35 1997 May 1997
Troy,OH - 100 2,435 306 100 2,741 2,841 39 1997 May 1997
Waco, TX - 100 2,235 - 100 2,235 2,335 35 1997 Jun. 1997
Tulsa, OK - 100 2,395 - 100 2,395 2,495 38 1997 Jun. 1997
San Antonio, TX - 100 2,055 - 100 2,055 2,155 32 1997 Jun. 1997
Norfolk, NE - 100 2,123 - 100 2,123 2,223 29 1997 Jun. 1997
Wahoo, NE - 100 2,318 - 100 2,318 2,418 26 1997 Jul. 1997
York, NE - 100 2,318 - 100 2,318 2,418 26 1997 Aug. 1997
Hoquiam, WA - 100 2,500 - 100 2,500 2,600 28 1997 Aug. 1997
Tiffin, OH - 100 2,435 - 100 2,435 2,535 27 1997 Aug. 1997
Millville, NJ - 100 2,825 - 100 2,825 2,925 31 1997 Aug. 1997
Fremont, OH - 100 2,435 - 100 2,435 2,535 27 1997 Aug. 1997
Lake Havasu, AZ - 100 2,420 - 100 2,420 2,520 27 1997 Aug. 1997
Greeley, CO - 100 2,310 - 100 2,310 2,410 26 1997 Aug. 1997
Springfield, OH - 100 2,035 - 100 2,035 2,135 19 1997 Aug. 1997
Watauga, TX - 100 1,667 - 100 1,667 1,767 16 1996 Aug. 1997
Bullhead City, AZ - 100 2,500 - 100 2,500 2,600 22 1997 Aug. 1997
Arvada, CO - 100 2,810 - 100 2,810 2,910 25 1997 Aug. 1997
Edmond, OK - 100 1,365 4 100 1,369 1,469 13 1996 Aug. 1997
Wetherford, OK - 100 1,668 3 100 1,671 1,771 15 1996 Aug. 1997
Eugene, OR - 100 2,600 - 100 2,600 2,700 23 1997 Sep. 1997
Caldwell, ID - 100 2,200 - 100 2,200 2,300 20 1997 Sep. 1997
Burley, ID - 100 2,200 - 100 2,200 2,300 20 1997 Sep. 1997
Wheelersburg, OH - 100 2,435 - 100 2,435 2,535 16 1997 Sep. 1997
Loveland, CO - 100 2,865 - 100 2,865 2,965 19 1997 Sep. 1997


54


LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)



INITIAL COST GROSS AMOUNT IN WHICH
TO CARRIED AT DECEMBER 31,
COMPANY 1997
----------------- COSTS ---------------------------
BUILDING CAPITALIZED BUILDING
AND SUBSEQUENT AND ACCUM. CONSTRUCTION/
IMPROVE- TO IMPROVE- DEPREC. RENOVATION ACQUISITION
ENCUMBRANCES LAND MENTS ACQUISITION LAND MENTS TOTAL(1) (2) DATE DATE
------------ ------- -------- ------------ ------- -------- -------- ------- ------------- -----------

Assisted Living
Residences:
Wichita Falls, TX - 100 2,750 100 2,750 2,850 25 1997 Sep. 1997
Beatrice, NE - 100 2,173 100 2,173 2,273 10 1997 Oct. 1997
Madison, IN - 100 2,435 100 2,435 2,535 11 1997 Oct. 1997
Newark, OH - 100 2,435 100 2,435 2,535 11 1997 Oct. 1997
Elkhart, IN - 100 2,435 100 2,435 2,535 - 1997 Dec. 1997
------------ ------- -------- ---------- ------- -------- -------- -------
ALFs 13,616 5,452 120,492 1,029 5,452 121,521 126,973 2,834
------------ ------- -------- ---------- ------- -------- -------- -------
$70,401 $16,246 $297,604 $5,020 $16,246 $302,624 $318,870 $20,042
------------ ------- -------- ---------- ------- -------- -------- -------
------------ ------- -------- ---------- ------- -------- -------- -------


(1) The aggregate cost for federal income tax purposes.

(2) Depreciation for building is calculated rising a 35 year life for skilled
nursing facilities and 40 year life for assisted living residences and
additions to facilities. Depreciation for furniture and fixtures is
calculated based on a 7 year life for all facilities.

(3) Single note backed by five facilities in Alabama.

(4) Single note backed by two facilities in Washington,

(5) Single note backed by six facilities in Iowa and one facility in Texas.

(6) Single note backed by two facilities in Alabama.

(7) Single note backed by five facilities in Washington.

Activity for the years ended December 31, 1995, 1996 and 1997 is as follows:



Real Estate Accumulated
& Equipment Depreciation
----------- ------------

Balance at December 31, 1994 $ 73,118 $ 2,490
Additions 44,151 2,997
Cost of real estate sold - -
----------- ------------
Balance at December 31, 1995 117,269 5,487
Additions 113,959 6,214
Cost of real estate sold (7,650) (61)
----------- ------------
Balance at December 31, 1996 223,578 11,640
Additions 127,937 9,040
Write-down of properties (1,400) -
Cost of real estate sold (31,245) (638)
----------- ------------
Balance at December 31, 1997 $318,870 $20,042
----------- ------------


55


LTC PROPERTIES, INC.
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
(Dollars in thousands)


NUMBER OF FINAL FACE AMOUNT CARRYING AMOUNT CURRENT
----------------------- INTEREST MATURITY BALLOON OF OF MORTGAGES MONTHLY
STATE FACILITIES UNITS/BEDS RATE(1) DATE AMOUNT(2) MORTGAGES DECEMBER 31, 1997 DEBT SERVICE
- --------------- ---------- ---------- ----------- --------- --------- ----------- ----------------- ------------

SC 5 509 11.90% 2003 $ 11,212 $ 11,250 $ 11,203 $ 112
MS 3 400 10.32% 2006 10,564 11,250 11,197 98
MT/NE/IA 4 305 11.22% 2007 8,752 10,000 9,963 93
TN 2 245 11.38% 2007 7,763 8,675 8,646 83
FL 2 251 10.75% 2006 7,260 8,200 8,093 74
Various(2) 105 11,132 9.00-14.32% 1998-2018 129,759 230,859 205,992 1,840
--- ---------- --------- ----------- -------- ------
121 12,842 $175,310 $280,234 $255,094(3) $2,300
--- ---------- --------- ----------- -------- ------
--- ---------- --------- ----------- -------- ------


(1) Represents current stated interest rate. Generally, the loans have 25
year amortization with principal and interest payable at varying
amounts over the life to maturity with annual interest adjustments
through specified fixed rate increases effective either on the
first anniversary or calendar year of the loan.

(2) Balloon payment is due upon maturity, generally the 10th year of the
loan, with various prepayment penalties (as defined in the loan
agreement).

(3) The carrying amount equals the aggregate cost for federal income tax
purposes. No loan has been extended or renewed or has any prior liens.

(4) Includes 84 first-lien mortgage loans and 14 construction loans as
follows:



NO. OF
LOANS ORIGINAL LOAN AMOUNTS,
--------------------------------

49 $ 305 - $2,000
29 $2,001 - $3,000
7 $3,001 - $4,000
7 $4,001 - $5,000
4 $5,001 - $6,000
0 $6,001 - $7,000
2 $7,001 - $7,706


Activity for the years ended December 31, 1995, 1996 and 1997 is as follows:




Balance at December 31, 1994 $ 62,782
New Mortgage loans 101,908
Collections of principal (2,634)
----------
Balance at December 31, 1995 162,056
New Mortgage loans 130,965
Sales of notes to REMIC (112,487)
Collections of principal (2,272)
----------
Balance at December 31, 1996 178,262
New Mortgage loans 111,157
Conversion of notes to owned properties (9,348)
Collections of principal (24,977)
----------
Balance at December 31, 1997 $ 255,094
----------
----------


56

INDEX TO EXHIBITS
(ITEM 14(b))



EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 Amended and Restated Articles of Incorporation of LTC
Properties, Inc. (incorporated by reference to Exhibit 3.1
to LTC Properties, Inc.'s Current Report on Form 8-K dated
June 19, 1997)
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.1 to LTC Properties, Inc.'s Form 10-Q for
the quarter ended June 30, 1996)
3.3 Articles Supplementary Classifying 3,080,000 shares of 9.5%
Series A Cumulative Preferred Stock of LTC Properties, Inc.
(incorporated by reference to Exhibit 3.2 to LTC Properties,
Inc.'s Current Report on Form 8-K dated June 19, 1997)
3.4 Articles of Amendment of LTC Properties, Inc. (incorporated by
reference to Exhibit 3.3 to LTC Properties, Inc.'s Current
Report on Form 8-K dated June 19, 1997)
3.5 Articles Supplementary Classifying 2,000,000 Shares of 9.0%
Series B Cumulative Preferred Stock of LTC Properties, Inc.
(incorporated by reference to Exhibit 2.5 to LTC Properties,
Inc.'s Registration Statement on Form 8-A filed on December 15,
1997)
4.1 Indenture dated August 25, 1992 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to 9.75%
Convertible Subordinated Debentures due 2004 (incorporated by
reference to Exhibit 4.1 to LTC Properties, Inc.'s Form 10-K for
the year ended December 31, 1992)
4.2 Indenture dated September 23, 1994 between LTC Properties, Inc.
and Harris Trust and Savings Bank, as trustee (incorporated by
reference to Exhibit 4.2 to LTC Properties, Inc.'s Form 10-K for
the year ended December 31, 1994)
4.3 First Supplemental Indenture dated as of September 23, 1994
to Indenture dated September 23, 1994 between LTC
Properties, Inc. and Harris Trust and Savings Bank, as
trustee with respect to $30,000,000 in principal amount of
8.5% Convertible Subordinated Debentures due 2000
(incorporated by reference to Exhibit 4.3 to LTC Properties,
Inc.'s Form 10-K for the year ended December 31, 1994)
4.4 Second Supplemental Indenture dated as of September 21, 1995
to Indenture dated September 23, 1994 between LTC
Properties, Inc. and Harris Trust and Savings Bank, as
trustee with respect to $51,500,000 in principal amount of
8.5% Convertible Subordinated Debentures due 2001
(incorporated by reference to Exhibit 10.17 to LTC
Properties, Inc.'s Form 10-Q for the quarter ended September
30, 1995)
4.5 Third Supplemental Indenture dated as of September 26, 1995
to Indenture dated September 23, 1994 between LTC
Properties, Inc. and Harris Trust and Savings Bank, as
trustee with respect to $10,000,000 in principal amount of
8.25% Convertible Subordinated Debentures due 1999
(incorporated by reference to Exhibit 10.19 to LTC
Properties, Inc.'s Form 10-Q for the quarter ended September
30, 1995)
4.6 Fourth Supplemental Indenture dated as of February 5, 1996
to Indenture dated September 23, 1994 between LTC
Properties, Inc. and Harris Trust and Savings Bank, as
trustee with respect to $30,000,000 in principal amount of
7.75% Convertible Subordinated Debentures due 2002
(incorporated by reference to Exhibit 4.6 to LTC Properties,
Inc.'s Form 10-K for the year ended December 31, 1995)
10.1 Master Repurchase Agreement dated May 14, 1993 between LTC
Properties, Inc. and Goldman Sachs Mortgage Company
(incorporated by reference to Exhibit 10.5 to LTC Properties,
Inc.'s Form 10-Q for the quarter ended June 30, 1993)
10.2 Purchase Agreement dated July 28, 1993 between LTC Properties,
Inc., LTC REMIC Corporation and Goldman Sachs Mortgage Company
(incorporated by reference to Exhibit 10.6 to LTC Properties,
Inc.'s Form 10-Q for the quarter ended June 30, 1993)

57

INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(b))


EXHIBIT
NUMBER DESCRIPTION
------ -----------

10.4 Transfer and Repurchase Agreement, dated as of July 20, 1993,
between LTC Properties, Inc. and LTC REMIC Corporation
(incorporated by reference to Exhibit 10.10 to LTC Properties,
Inc.'s Form 10-K for the year ended December 31, 1994)
10.5 Pooling and Servicing Agreement, dated as of July 20, 1993,
among LTC REMIC Corporation, as depositor, Bankers Trust
Company, as master servicer, LTC Properties, Inc., as
special servicer and originator and Union Bank, as trustee
(incorporated by reference to Exhibit 10.11 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31,
1994)
10.6 Transfer and Repurchase Agreement, dated as of November 1, 1994,
between LTC Properties, Inc. and LTC REMIC Corporation
(incorporated by reference to Exhibit 10.12 to LTC Properties,
Inc.'s Form 10-K for the year ended December 31, 1994)
10.7 Pooling and Servicing Agreement, dated as of November 1, 1994,
among LTC REMIC Corporation, as depositor, Bankers Trust
Company, as master servicer, LTC Properties, Inc., as special
servicer and originator and Marine Midland Bank, as trustee
(incorporated by reference to Exhibit 10.13 to LTC Properties,
Inc.'s Form 10-K dated December 31, 1994)
10.8 Amended Deferred Compensation Plan (incorporated by reference to
Exhibit 10.17 to LTC Properties, Inc.'s Form 10-K for the year
ended December 31, 1995)
10.9 Pooling and Servicing Agreement dated as of March 1, 1996,
among LTC REMIC Corporation, as depositor, GMAC Commercial
Mortgage Corporation, as Master Servicer, LTC Properties,
Inc., as Special Servicer and Originator, LaSalle National
Bank, as Trustee and ABN AMRO Bank, N.V., as fiscal agent
(incorporated by reference to Exhibit 10.1 to LTC
Properties, Inc.'s Form 10-Q for the quarter ended March 31,
1996)
10.10 Transfer and Repurchase Agreement by and between LTC Properties,
Inc. and LTC REMIC Corporation dated as of March 1, 1996
(incorporated by reference to Exhibit 10.2 to LTC Properties,
Inc.'s Form 10-Q for the quarter ended March 31, 1996)
10.11 Guarantee Agreement between Kansas-LTC Corporation, L-Tex GP,
Inc., and L-Tex LP, Inc., Rusk-Tex, LP, Inc., Texas-LTC Limited
Partnership, as guarantors, and Sanwa Bank California, as the
agent, dated as of May 21, 1996 (incorporated by reference to
LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30,
1996)
10.12 Amended and Restated 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.22 to LTC Properties, Inc.'s Form 10-K
for the year ended December 31, 1996)
10.13 Subservicing Agreement dated as July 20, 1993 by and between
Bankers Trust Company, as Master Servicer and LTC Properties,
Inc., as Special Servicer (incorporated by reference to Exhibit
10.25 to LTC Properties, Inc.'s Form 10-K/A for the year ended
December 31, 1996)
10.14 Custodial Agreement dated as of July 20, 1993 by and among Union
Bank, as Trustee, LTC REMIC Corporation, as Depositor, and
Bankers Trust Company as Master Servicer and Custodian
(incorporated by reference to Exhibit 10.26 to LTC Properties,
Inc.'s Form 10-K/A for the year ended December 31, 1996)
10.15 Form of Certificates as Exhibit as filed herewith to the
Pooling and Servicing Agreement dated as of July 20, 1993
among LTC REMIC Corporation, as Depositor, Bankers Trust
Company, as Master Servicer, LTC Properties, Inc. as Special
Servicer and Originator and Union Bank as Trustee
(incorporated by reference to Exhibit 10.11 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31,
1994)
10.16 Purchase Agreement dated November 16, 1994 between LTC REMIC
Corporation, LTC Properties, Inc. and Goldman Sachs & Co.
Trustee (incorporated by reference to Exhibit 10.28 to LTC
Properties, Inc.'s Form 10-K/A for the year ended December 31,
1996)

58
INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(b))



10.17 Form of Certificates, Form of Custodial Agreement and Form
of Subservicing Agreement as Exhibits as filed herewith to
the Pooling and Servicing Agreement dated as of November 1,
1994 among LTC REMIC Corporation, as Depositor, Bankers
Trust Company, as Master Servicer, LTC Properties, Inc. as
Special Servicer and Originator and Marine Midland Bank as
Trustee (incorporated by reference to Exhibit 10.13 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31,
1994)
10.18 Purchase Agreement dated March 27, 1996 between LTC REMIC
Corporation, LTC Properties, Inc. and Goldman Sachs & Co.
(incorporated by reference to Exhibit 10.30 to LTC Properties,
Inc.'s Form 10-K/A for the year ended December 31, 1996)
10.19 Form of Certificates, Form of Custodial Agreement and Form
of Subservicing Agreement as Exhibits as filed herewith to
the Pooling and Servicing Agreement dated as of March 1,
1996 among LTC REMIC Corporation, as Depositor, GMAC
Commercial Mortgage Corporation, as Master Servicer, LTC
Properties, Inc. as Special Servicer and Originator and
LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as
Fiscal Agent (incorporated by reference to Exhibit 10.1 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended March
31, 1996)
10.20 Senior Unsecured Revolving Line of Credit Agreement dated
October 3, 1997 between LTC Properties, Inc. and Banque National
de Paris, Sanwa Bank, California and The Sumitomo Bank
(incorporated by reference to Exhibit 10.2 to LTC Properties,
Inc.'s Form 10-Q for the quarter ended September 30, 1997)
21.1 List of subsidiaries as filed herewith
23.1 Consent of Ernst & Young LLP with respect to the financial
information of the Company as filed herewith
27.1 Financial data schedule for the year ended December 31, 1997
as filed herewith.
27.2 Restated financial data schedules for the three months ended
March 31, 1997, June 30, 1997 and September 30, 1997 as
filed herewith.
27.3 Financial data schedules for the years ended December 31, 1996
and 1995 as filed herewith.
27.4 Restated financial data schedules for the three months ended
March 31, 1996, June 30, 1996 and September 30, 1996 as
filed herewith.


59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
securities Exchange Act of 1934. Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

LTC Properties, Inc.
Registrant



Dated: March 25, 1998 By: /s/ JAMES J. PIECZYNSKI
--------------------------------
JAMES J. PIECZYNSKI
President, Chief Financial Officer
and Director


/s/ ANDRE C. DIMITRIADIS
- --------------------------- Chairman of the Board, Chief March 25, 1998
ANDRE C. DIMITRIADIS Executive Officer and Director


/s/ EDMUND C. KING
- ----------------------------- Director March 25, 1998
EDMUND C. KING


/s/ WENDY L. SIMPSON
- ----------------------------- Director March 25, 1998
WENDY L. SIMPSON


/s/ SAM YELLEN
- ----------------------------- Director March 25, 1998
SAM YELLEN



60